International Financial Reporting Standards IFRS Generally Accepted Essay
- Length: 5 pages
- Sources: 8
- Subject: Accounting
- Type: Essay
- Paper: #23696131
Excerpt from Essay :
International Financial Reporting Standards (IFRS)
Generally Accepted Accounting Principles (U.S. GAAP)
US GAAP is the general accounting principles, standard, and procedures that the U.S. companies follow to prepare their financial statements. GAAP has combination of accepted standards that the companies should follow when recording and reporting their accounting information. For example, GAAP has set up the rules that companies should follow when preparing the financial data such as balance sheet, revenue recognition, and outstanding shares recognition.
GAAP also mandates the companies to have consistence, relevance, reliable, and comparable accounting standards. One of the main objectives for setting up GAAP is to assist the investors to have minimum level of consistency when analyzing the financial statement of a company.
The basic four accounting principles that GAAP lays down are as follows:
Historical Cost Principle: GAAP makes it mandatory for companies to consider the acquisition of costs.
Revenue Recognition Principle: This refers to accrual basis accounting.
Matching Principle: This allows evaluation of actual profitability and performance.
Principle of Full Disclosure: Companies should keep the costs minimum when disclosing their financial statements.
Accounting statement not following the U.S. GAAP accounting principles may not be a genuine accounting standards .(Thornton, 2007).
"International Financial Reporting Standards" (IFRS)
"International Financial Reporting Standards (IFRS)" is the accepted international accounting standard that the public traded companies implement when preparing their financial statements. The aim of IFRS is to create accounting standards that could be applied in both developing and advanced countries. In the contemporary business environment where companies cross borders to transact businesses, recognized accounting standard in one country may not be applicable in another country because different countries have set of rules that the companies must follow when preparing their financial statements. Since different countries have different interpretations of business transactions, the difficulties often arise on the analysis and interpretation of financial statements across nations.
With difficulties facing organizations in the analysis and interpretation of financial statement across nations, the investors, business organizations, and regulators are now realizing the importance of common international accounting standard in the financial reporting chain. (Chakrabarty, 2011). Many countries now believe that incorporating IFRS standard in preparing company financial statement promotes economic growth. With importance of IFRS in preparing financial statement, countries have started allowing business organizations to make use of IFRS to prepare their consolidated financial statements. For example, the European Union has mandated all companies incorporated in the member countries to prepare their financial statements in accordance with the IFRS. In addition, Australia, New Zealand, and Israel have mandated the incorporated companies in their territories to prepare their financial statements in accordance with the IFRS. (AICPA, 2011).
Norwalk Agreement (October 2002)
"Norwalk Agreement is a memorandum of understanding signed on October 2002 between the Financial Accounting Standards Board (FASB). This agreement, concluded in Norwalk, CT, established a joint commitment to develop compatible accounting standards that could be used for both domestic and cross-border financial reporting" (AICPA, P 3).
Following the meeting of the FASB and IASB in October 2002 in Norwalk, the agreement is to formalize the convergence of general accepted accounting principles in the United States (U.S. GAAP) and International Financial Reporting Standards (IFRSs). In the memorandum of understanding issued in the Norwalk agreement, the FASB and IASB pledge to:
Make existing financial accounting reporting standards compatible as soon as it is practicable.
Coordinate their future programs to enhance compatibility.
Ensure that there is no significant difference in the two sets of financial reporting standards. (Wild, 2007).
Generally Accepted Auditing Standards
General Accepted Auditing Standards (GAAS) is a systematic guideline that an auditor must follow when conducting auditing for a company. GAAS pledges an auditor to maintain accuracy and consistence in the auditing report. Auditing provides the standard measure by which an independent auditor conducts plans and reports the results of an audit in accordance with the accepted auditing standards.
By following the GAAS principles, an auditor is likely to minimize the missing material information when auditing the financial statement of a company. GAAS provides the auditing procedures in which independent auditors must follow when implementing their auditing professions. One of the standard procedures that an auditor must follow is the standard of reporting by which "the auditor must state in the auditor's report whether the financial statements are presented in accordance with generally accepted accounting principles." (AICPA 2006). According to GAAS, an auditor must also state in his opinion the reliability of the financial statement of a company as whole. The entire scenario is to enhance the integrity of the company financial statements.
International Auditing and Assurance Standards
International Auditing and Assurance Standards is an independent board that is charged to set high international standards on auditing (ISAs) and assurance standards. The International Auditing and Assurance Standards "facilitate convergence in the national and international auditing and assurance standard. This contributes to enhanced quality and uniformity of practice in these areas throughout the world, and strengthened public confidence in financial reporting." (IFAC, 2011 P. 1).
Relationship among the five concepts is that they all aim to enhance the accuracy of the accounting standards. While the IFRS and International Auditing and Assurance Standards set up the accounting and auditing principles that companies should follow at international levels, the U.S. GAAP, GAAS and Norwalk Agreement (October 2002) set up the accounting principles that the company should follow at national levels.
Apple Inc. is a Californian corporation founded in 1977. Apple specializes in the manufacturing, design and market of varieties of devices such as computes, portable digital music players, mobile communication media devices and other varieties of electronic consumer products. The company products include iPhone, iPod, Macintosh computers, iOS operating system, and variety of accessories.
Analysis of the company financial statement reveals that the company accounting policies is in conformity with the U.S. generally accepted accounting principles (U.S. GAAP).To conform with the GAAP policies, the company prepares its consolidated financial statement based on the historical assumptions and judgment value of company assets and liabilities. To conform to the GAAP accounting policies, the company also prepares its financial statements by estimating financial data such as revenue recognition, inventory purchase, and valuation of market securities, warrant costs, income taxes, legal, and other contingencies. (Apple Annual Report, 2010).
Similar to the accounting policies, Apple Inc. also conducts the auditing of its company by following the principles of the Generally Accepted Auditing Standards. To follow the principles of the GAAS, Apple hires the service of an independent auditing firm, Ernst & Young LLP, to audit the company-consolidated balance sheets of the fiscal year 2010. The main objective of using an independent auditing firm is to evaluate the company financial statement in order to enhance the accuracy of the company financial data. By following the principle of GAAS, the independent auditing firm has provided expert opinion by maintaining that the financial statement of the company presents fairly consolidated financial position of Apple. (Annual Report, 2010).
With reference to the accounting policies, Nikon Corporation also uses the Japanese GAAP principles to prepare the company accounting statements. Nikon specializes in the manufacturing of the wide range of products such as optical technology, digital camera, scanners, microscopes and measuring equipments. In preparing the consolidated accounting statement for the 2010 fiscal year, Nikon uses Japanese GAAP principles which are similar to the U.S. GAAP. The only difference is that the Japanese GAAP was formed from the Japanese Financial Instruments and Exchange Act while U.S. GAAP was formed to guide the U.S. companies on the accounting principles.
In addition, Nikon uses the service of an independent auditor (Delloitte Touche Tohmatsu) to conduct the auditing of the company financial statement for the 2010 fiscal year. To conduct the auditing of the company, the auditor does not follow the principles of Generally Accepted Auditing Standards; the auditor of Nikon Corporation only follows the Japanese auditing standards. (Annual Report, 2010).
Swatch Group specializes in the production of stylist wrist watches and jewelry. Contrary to Apple that follows U.S. GAAP in preparing the company financial statements and Nikon that follows Japanese GAAP principles, the Swatch group follows "International Financial Reporting Standards (IFRS)" policies with the interpretation adopted by the International Accounting Standards Board (IASB) in preparing the company financial statements. (Annual Report, 2010).
Similar to Apple and Nikon, Swatch group also uses PricewaterhouseCoopers as an independent auditor to audit the company financial statements for the 2010 fiscal year. Contrary to Apple that follows the principles of the Generally Accepted Auditing Standards for auditing of its consolidated financial statements and Nikon that uses Japanese auditing standard, the auditor of the Swatch group conducted the company auditing by following the Swiss law and Swiss Auditing Standards and International Standards. (Annual Report, 2010).
Based on the financial information found in the annual reports of Apple, Nikon, and Swatch, it is revealed Apple uses U.S. GAAP principles to prepare the company financial statement for the 2010 fiscal year. The auditor also uses GAAS guiding principles to conduct auditing for the company.
Similarly, Nikon also uses Japanese…