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S. GAAP," 2012). In other circumstances, IFRS requires the combination of two or more transactions when they are linked in a manner that the commercial impact can only be understood through referring to the transactions as a whole.
Customer Loyalty Programs:
Under IFRS accounting standards, loyalty or award programs in which a customer earns credit depending on their purchase of goods and/or services should be accounted for as multiple-element arrangements. Therefore, these accounting rules necessitate deferring and distinct recognition of the fair value of the award credits after the realization of every applicable criterion for revenue recognition. These guidelines are applicable regardless of whether the credits can be redeemed for goods and services issued by the business or those supplied by another business.
On the contrary, accounting for customer loyalty programs within U.S. GAAP is characterized with some differences since there are two very dissimilar methods used by entities. While some businesses use a multiple-element accounting method, others employ an incremental cost model. The multiple-element accounting method is where allocation of revenue to the award credits is based on seeming fair value. In contrast, incremental cost model is the fulfillment costs are considered as expenses and accumulated on that basis instead of being deferred in relation to relative fair value. Since they have different approaches, the two accounting methods for customer loyalty programs can result in significantly varying accounting.
As previously mentioned, IFRS and GAAP differ in their conceptual approaches where the former is principles-based while the latter is rules-based (Forgeas, 2008). The essential characteristic of a principles-based accounting framework is the likelihood of different interpretations for the same transactions. This not only implies second-guessing but also generates uncertainty that necessitate broad disclosures in the financial statements. Unlike a principles-based framework, a rules-based framework has more exceptions. From a conceptual perspective, IFRS and GAAP differ in relation to the methodology of evaluating an accounting treatment. IFRS has a more thorough review of the facts pattern whereas research under GAAP is mainly focused on the literature.
The other significant difference in the structure of GAAP and IFRS is consolidation where IFRS prefers a control model while GAAP favors a risks-and-rewards model. This implies that under IFRS, some business consolidated with FIN 46(R) may need to be displayed differently.
Required Financial Periods:
GAAP accounting principles basically support presentation of comparative financial statements though a single fiscal year may be presented in certain situations. During this process, public companies must adhere to the rules of Securities and Exchange Commission that generally require balance sheets to the two latest financial years. In addition SEC rules require presentation of other financial statements covering the 3-year period completed on the date of the balance sheet. In contrast, under IFRS, comparative financial information must be presented in light of the previous fiscal period for the total amounts reported in the financial statements.
Balance Sheet and Income Statement Layout:
The United States Generally Accepted Accounting Principles do not specify a particular layout or general requirement for preparing balance sheet and income statement. However, public companies must comply with the stipulated requirements in Regulation S-X. While IFRS does not provide a standard layout for this process, it provides a list of minimum items that are seemingly less prescriptive than Regulation S-X requirements ("U.S. GAAP vs. IFRS," 2011). GAAP and IFRS also differ with regards to classification of expenses, extraordinary items, and discontinued operations presentation in income statements.
Performance Measures Disclosure:
The Securities and Exchange Commission defines some major measures and requires presentation of some headings and subtotals under GAAP. In addition, public firms are banned from disclosing non-GAAP measures in the financial statements and associated notes. In contrast, IFRS promotes diversity in practice regarding headings, line items, and subtotals because some conventional concepts like operating profit are not defined. Therefore, disclosure of performance measures under IFRS is based on what is relevant to the company's understanding of financial performance.
The two accounting rules differ in presentation of debt as current vs. non-current in the balance sheet. Under IFRS, debt liked to breach of agreement must be shown as current unless the lender covenant was reached before the date of the balance sheet. On the contrary, debt associated with agreement violation may be presented as non-current as long as there is a lender agreement to relinquish the demand for repayment at least one year before presentation of the financial statements.
IFRS Conversion Process:
The process of transiting from GAAP to IFRS in the United States has followed a relatively different path than other countries that have already adopted the global accounting rules. In comparison to other countries, the FASB and ISAB have been working on IFRS convergence in the United States for many years. Notably, the process of transiting to IFRS was re-emphasized by the recent SEC proposal. IFRS conversion in the United States is slowly taking place despite of the belief by many accountants that GAAP would develop to become the only set of accounting standards throughout the world.
The process of IFRS conversion in the United States from GAAP started in 2005 after the European Union and some regions in Southeast Asia and the Pacific adopted or move towards the global accounting rules. Actually, it was expected that nearly all companies (except U.S.-based entities) in Fortune Global 500 companies would report using IFRS by 2011. Since then, the momentum towards IFRS for U.S. companies has continued to grow to an extent that serious concerns have been raised regarding duration it will take for the United States to completely adopt IFRS rules.
The culmination of these efforts was when the Securities and Exchange Commission proposed a roadmap of 2014 -- 2016 for IFRS adoption though the actual date of this conversion is yet to be announced. Consequently, several companies, especially those in the banking and capital markets industry have become more interested in IFRS and its potential impacts on financial results and operational efficiency ("Converting to IFRS," 2009).
IFRS conversion generally begins as an accounting change but rapidly saturates the entire company by affecting major operational processes like product development, treasury, human resources, taxation, performance management, and information technology. This implies that a company's transition to IFRS requires the involvement of several functional areas at the beginning of the conversion in order to avoid negative implications on the firm's operations. As a result, the senior management should be engaged in establishing a conversion philosophy and provide the focus through the multi-year initiative.
While it is unlikely that Securities and Exchange Commission will require or permit the global accounting standards for domestic public companies in the foreseeable future, FASB and IASB have continued to move towards completion of accounting standards on financial instruments, leasing, and revenue recognition. In the past few years, the two accounting boards have concluded significant converged approaches for leases and revenue recognition. Furthermore, there are expectations that a converged ultimate revenue recognition standard will be provided within the first half of this year as well as a re-exposure of the combined leases proposal within the same period ("U.S. GAAP Convergence and IFRS," 2013).
As part of their initiatives to enable IFRS conversion in the United States, IASB and FASB have widely agreed on measurement and classification of debt instruments though they have temporarily converged on varying models of impairment. While the FASB described its impairment model in December 2012, the IASB targeted to expose its impairment model in the first quarter of the year. Consequently, the Financial Accounting Standards Board continues to use its new impairment model and is on the verge of providing an exposure draft. Moreover, FASB is moving towards re-exposing its proposed model in early 2014 whereas IASB recently exposed restricted alterations to its measurement and classification standard.
The Financial Accounting Standards Board and International Accounting Standards Board have made some major decisions in their attempts to issue exposure drafts and final standards ("U.S. GAAP Convergence and IFRS," 2013). One of the major concepts that occupied much of their combined initiatives is revenue recognition since they were involved in addressing several re-deliberation issues. Even though the boards have reached converged methods for some major financial operations like leases and revenue recognition, a converged solution for insurance contracts is yet to be obtained. This is despite of the lengthy debates and deliberations that the boards have been involved in though they were expected to expose their latest insurance proposals in the first half of 2013.
Despite of these attempts by FASB and IASB to enable IFRS conversion in America, companies should remain involved in the process of setting standards. In addition to having a good understanding of the changes in financial reporting, these companies require new systems that help in developing and evaluating complex estimates. Moreover, companies may need to provide stakeholder and investor communication and education. However, the need for new systems is dependent on the firm's understanding of financial reporting changes since some companies are likely to be impacted more than others.
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