Comparing Gaap to Ifrs
Comparing Gaap to Ifrs
Comparing GAAP to IFRSSonya CampbellOctober 14, 2014 ACC/291 Judith Bines Introduction Both the International Financial Reporting Standards, also known as the IFRS and the Generally Accepted Accounting Principles, also known as GAAP are similar when it comes to the bottom line of what’s accepted in financial reporting/accounting for businesses but at the same time they have their differences. They differ in how they are presented to the way they recognize revenue. We will explore their differences and similarities in this paper by comparing IFRS to GAAP. The IFRS and GAAP conceptual frameworks does not differ in terms of their objective as far as financial reporting. Both the IFRS and GAAP agree that the accounting financial reporting data for companies should be factual and honestly represented. All information should be relevant and deemed useful in order for investors, regulators and creditors to examine the financial data. All estimates and information should be verified by factual data which in turn should be relevant to the data that’s being presented. Furthermore, the information must be within regulated guidelines and standards in the industry. Overall both have the same financial reporting objective. Some people insist that the internal control requirements of the Sarbanes-Oxley Act (SOX) put U.S. companies at a competitive disadvantage to companies outside the United States. There are pros and cons to the competitive implications of SOX. After SOX was implemented in 2002 American businesses had to spend money in order to recover the compliance expenses that was required to implement SOX. Many concur that it is a more reliable financial system, foreign investors are more comfortable with investing now that it’s in place while the risks are tremendously reduced now that SOX has been implemented.
Fair market measurements provide users of financial statements with an accurate picture of the value of a company’s assets. Both the IFRS and GAAP require firms to include information regarding fair value measurement practices in the notes of financial statements. Either of the systems companies will be required to report an asset at either book value or fair value, depending on the situation. As a generalized rule all assets in the same class must receive the same valuation treatment in regards to the value of receivables, IFRS uses a 2teired method that first analyzes individual receivables then looks at the receivables as a whole to determine if they are of any importance. Components for depreciation happens when an asset has different parts that should be depreciated with different treatment. Under IFRS firms are required to use component depreciation if the parts of the assets offer varying patterns of benefits. The reasoning behind this is that it provides a clearer picture of the assets book value. This method is also permitted under GAAP but U.S companies rarely use this practice.The reevaluation of plant assets can be defined as the process of change values from the book value to fair value. This process is required in the event that there have been substantial economic changes in the market. An example of this would be if a company bought a building 10 years ago and appreciated due to a real estate boom, it can be reevaluated at the fair value. If an asset is reevaluated under IFRS it is a requirement that all assets in its class must be treated with in the same valuation method. This is to make sure that companies maintains consistency in valuations for the same types of assets. Companies that utilize GAAP standards are required to expense all research and development costs by reporting them on the income statements. IFRS only places this requirement on research costs. Once technological viability had been reached it is optional for a company to start reporting development costs as capital expenditures. This allows the costs to be depreciated over the useful life that the technology allows. A contingent ability is an obligation that has the probability of re occurring in the future. This will not appear on any statements but will have notes made pertaining to it. An example of such would be an oil spill in the Mediterranean sea, that company would be held liable, that is considered contingent liability, they may be fines imposed and the responsibility of the clean-up would be upon that company. The fines would be administered by the foreign union of environmental violations. The basic liabilities between GAAP and IFRS are very similarly, almost the same. With only few minor differences. On the balance sheet GAAP requires that liabilities be reported in order of liquidity, while IFRS uses reverse order of liquidity. When it comes to reporting interest expense GAAP permits the use of effective interest rate methods and the straight line method where as IFRS only uses the interest rate method. IFRS also has special rules for contingent liabilities which is not required under GAAP