Accounting GAAP and IFRS

Accounting includes recording, summarizing, and reporting of the economic activities and events of an organization. It is pertinent in business decision-making and the management and control of operations. The financial statements reported by a company include the income statement, balance sheet, statement of retained earnings and statement of cash flows. Globally, there are two sets of accounting standards, the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). In particular, the GAAP are more often than not employed in the United States whereas IFRS are more often than not employed in Europe and international expanses. IFRS are regarded as being more principles-based and U.S. GAAP as being more rules-based. The establishments responsible for setting the IFRS and GAAP are the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) respectively (Gaspar et al., 2016). The purpose of this paper is to discuss the difference between GAAP and IFRS.

One of the fundamental differences between IFRS and GAAP lies in the conceptual approach of the two accounting methods. On one hand, IFRS is principle based whereas GAAP is rule based. The intrinsic feature of a principles-based framework takes into account the potential of dissimilar interpretations for the same transactions. This circumstance entails second-guessing and therefore generate comprehensive disclosures in the financial statements. In particular, in a principle-based system of accounting, the areas of discussion or interpretation can be simplified and elucidated by the standards-setting board, and offer lesser exceptions compared to a rules-based system. Nonetheless, IFRS can consist of positions and guiding principles that can be simply and easily be deemed as sets of rules rather than sets of principles. During the adoption of IFRS, it was perceived that international standards were significantly rule-based in comparison to GAAP that were more principle-based. In addition, there is a dissimilarity with regard to the methodology employed on examining accounting treatment. With regard to the GAAP, the research lays more emphasis on the literature while on the other hand with regard to IFRS, the examination of the facts is more comprehensive (Forgeas, 2008).

In addition, the terminology that is employed in both accounting methods are largely dissimilar. For instance, under IFRS accounting approach, the terminology employed include ordinary share capital, nominal or face value and shareholders. On the other hand, under GAAP, the terminology employed include common stock, par value and stockholders. Moreover, there lies dissimilarity in the manner in which the two methods of accounting treat treasury stock. In particular, with respect to IFRS accounting approach, if an entity makes the decision to buy back shares of its own stock, then the entity is not permitted to record in its financial statements a gain or loss on the shares they purchase back (Epstein and Jermakowicz, 2008).

ASC 330, Inventory, and IAS 2, Inventories, are based on the principle that the most important foundation of accounting for inventory is cost. Nevertheless, there are major differences with regard to inventory costs between the two accounting methods. One of the key aspects of dissimilarity encompasses the costing methods. Under the GAAP method, either the last-in, first-out (LIFO) or the first-in, first out (FIFO) inventory estimates can be employed. On the other hand, under the IFRS approach, the LIFO method for accounting for inventory costs is not permitted. The same cost formula has to be applicable to all inventories that are similar in nature or use to the entity. A second aspect of dissimilarity takes into account measurement. With respect to U.S. GAAP, inventory is carried at the lower of cost or market. In this regard, market is delineated as prevailing cost of replacement, but not greater than the net realizable value and not less than the net realizable value decreased by a normal sales margin. On the other hand, with respect to IFRS, inventory is carried at the lower of cost or net realizable value. In this regard, the net realizable value is delineated as the approximated selling price minus the projected costs essential to making the sale (Ernst and Young, 2015).

Both IFRS and GAAP are delineated as non-monetary assets devoid of physical substance. The accounting treatment of acquired intangible assets facilitates in elucidating why the IFRS accounting method is deemed to be more principle-based. On one hand, the acquired intangible assets as per the GAAP happen to be measured at fair value whereas with respect to IFRS accounting method, it is solely measured in case the asset will have a futuristic economic advantage and has a calculated reliability. It is imperative to note that these assets encompass things such as research and development, goodwill, and costs of advertising (Bellandi, 2012). Another area of difference encompasses development costs. With respect to U.S. GAAP, development costs are expensed the way in which they incur with the exception of them being addressed by guiding principles in another ASC topic. On the other hand, with respect to IFRS, development costs are capitalized at the time when both economic and technical viability can be shown in line with specific criteria. A second area where the two accounting methods differ is with respect to advertising costs. Under IFRS, these costs for advertising and promotion are expensed as incurred. On the other hand, with regard to GAAP, then the costs are either expensed as incurred or expensed at the time when the advertising occurs for the very first time. IFRS and GAAP also differ in terms of revaluation. In particular, under GAAP, revaluation is not allowed. On the other hand, under IFRS, revaluation of intangible assets to their fair values is allowed with the exception of goodwill (Forgeas, 2008).

U.S GAAP and IFRS also differ with regard to consolidation in the sense that the latter places favoritism on a control model while on the other hand, GAAP has a preference for a risk and rewards model. Business combinations is another area in which these two methods of accounting differ. An aspect of consideration is the measurement of non-controlling interest. For U.S. GAAP, this is calculated at fair value and encompasses goodwill. On the other hand, as for IFRS, the constituents of non-controlling interest that are existing ownership interests as well as additionally designate a proportional share of the acquiree's net asset to their holders during the time of liquidation may be measured at fair value including goodwill and also the non-controlling interest's proportional share of the fair value of the acquiree's identifiable assets but does not include goodwill (Ernst and Young, 2015).

In both methods of accounting, long-lived assets are not usually tested every accounting year but instead at the time when there are similarly delineated indicators of impairment. One of the fundamental dissimilarities lie with respect to the method of ascertaining impairment, with respect to long-lived assets. Under IFRS, one-step method necessitated that the computation of impairment loss be undertaken in the event that impairment indicators are in existence. In contrast, with respect to GAAP, two-step method necessitates the undertaking of a recoverability test first and foremost. This takes into account comparing the carrying amount of the asset with the summation of futuristic non-discounted cash-flows that are generated by using them and the ultimate disposition. In the event that it is ascertained that the asset cannot be recovered, then it is necessary to calculate an impairment loss (Ernst and Young, 2015). In addition, IFRS and GAAP also differ in the computation of the impairment loss for long-lived assets. Under U.S. GAAP, this is considered to be the amount by which the carrying amount of the underlying assets surpasses its fair value. On the other hand, under IFRS, this is considered to be the amount by which the carrying amount of the underlying asset surpasses its recoverable amount. In this case, the recoverable amount is considered to be the higher of either the fair value less the costs to sell or the value in use, whichever is greater. The apportionment of goodwill is another aspect of dissimilarity. To begin with, under GAAP, goodwill is apportioned to a reporting unit. This is delineated as an operating segment. In contrast, under IFRS, goodwill is apportioned to a cash generating unit (CGU) or a number of CGUs that signify the lowermost level inside the entity wherein the goodwill is scrutinized and examined for the purposes of internal management and cannot be bigger than an operating segment (Ernst and Young, 2015).

At the outset of 2016, the FASB issued ASC 824 and the IASB issued IFRS 16 purposed on providing accounting treatment for leases. The FASB Accounting Standards Codification 842 Leases outlines the guiding principles that that lessees and lessors are means to apply to report valuable information to users of financial statement regarding the amount, timing, and ambiguity of cash flows emanating from a lease. IFRS 16 delineates the manner in which leases will be recognized, measured, presented and disclosed under International Financial Reporting Standards. This accounting standard is applicable to all leases as well as subleases. However, there are five exceptions. These consist of leases for the exploration or use of oil, natural gas and minerals, leases of biological assets, service concession contracts, licenses of intellectual property approved by a lessor, and lastly rights held by a lessee for licensing contracts for intangible assets, for instance, patents, copyrights, videos and films. According to ASC 842, the leases for lessees are classified as short-term leases, finance leases and operating leases. The lessee's accounting includes recognizing a right-of-use asset together with a lease liability for every lease. Nonetheless, a lessee might choose not to undertake the application of recognition requirements to short-term leases, and in its place recognize the lease payment over the term of the lease (PWC, 2017).

There are distinctive differences between the two accounting options. First, according to ASC 842, the leases for low-value assets are not exempted. In contrast, IFRS 16 allows the exemption for leases of low-value assets, which are $5,000 or lower when new. Secondly, the two accounting options differ in their accounting models for lessee accounting. In IFRS, a single lease model of accounting is applied. Secondly, lessees recognize a right-to-use asset as well as lease-liability. Moreover, all leases are treated in the form of an asset purchase on a financed footing. In contrast, U.S. GAAP applies a duel lease model. In addition, different from IFRS, operating leases are recognized on a straight-line basis of the total cost of the lease. In the lessor accounting model, under IFRS, with respect to finance leases, the net investment within the lease is recognized, which includes the lease receivable as well as unguaranteed residual asset. The same is applicable in ASC 842, but for direct financing leases and sales-type leases (KPMG, 2016).

In the two accounting methods, the ascertainment of whether entities are consolidated by a reporting entity is centered on control, even though there are dissimilarities in how the term control is delineated. An area of difference between the two accounting methods encompasses the consolidation model. GAAP provides for fundamentally two consolidation models, which are the voting model and the variable interest model. The latter assess control on the basis of ascertaining which party has power and benefits. The former assesses control on the basis of prevailing voting rights. Imperatively, initially all entities are examined as potential variable entities. If it is not, then it is assessed for control with respect to the voting model. On the other hand, different from GAAP, IFRS offers a single control model for all entities, encompassing structured entities. In addition, it is important to note that in GAAP potential voting rights are in overall not included in either evaluation of the two consolidation methods. As for IFRS, the voting rights are considered (Ernst and Young, 2015).

In accordance to ASC 605-50-45 Revenue Recognition, a cash consideration that is handed to a consumer by a vendor or retailer is deemed to be a decrease in the selling prices of the products or services retailed. This would imply that these cash considerations would be deemed as an expense and a decline in the revenue to be generated by the vendor. Nonetheless, the cash consideration can be deemed as an expense if it solely meets two requirements. First, the cash consideration has to give rise to an identifiable benefit that is separable from the purchase of the recipient, in the sense that the vendor could have achieved the benefit through a third party without the purchaser. Secondly, the value that is provided has to be sensibly approximated by the vendor (IAS Plus, 2016). On the other hand, under IAS 16, revenue recognition is undertaken solely when there is transference of the risks and rewards of ownership, and the vendor does not retain neither ongoing managerial participation to the extent normally linked with ownership nor efficacious control over the goods sold, revenues can be measured dependably, it is plausible that the economic benefits will flow to the company and the costs sustained or to be sustained in respect of the transaction can be measured reliably (Ernst and Young, 2015).