Comparison of IFRS and GAAP accounting standards

¶ … IFRS and GAAP

While there is a global movement towards convergence of accounting standards with more countries adopting IFRS, and many companies in areas where IFRS is not mandatory choosing to adopt the standards (Hillman, Heaston, & Dodd, 2012). However, while there are many similarities between IFRS and U.S. GAAP, there are also differences, some of which have only a minimal impact, other differences are more fundamental in nature. When looking at some of the differences, it becomes apparent that while IFRS adopts a principles based approach, GAAP has more prescriptive requirements (Ernst & Young, 2013)

IFRS 2-1 the fundamental foundations of IFRS dealing with presentation of the balance sheet which reflects the position of a firm have some differences. Under IFRS firms do not have to follow any specific order for listing the items on the sheet, although there is a recommendation that reporting of assets may be better presented in reverse order of liquidity. Under GAAP there is a more specific requirement, with the standard stating that the government should be presented ranked based on their liquidity; assets such as cash which are most liquid honest first, moving down through the level of liquidity (Pwc, 2015). In addition, the equity of the shareholders is the last item to be reported on the balance sheet.

IFRS 2-2 objectives of financial accounting are more similar than different, dealing with the conceptual frameworks of financial reporting. The two frameworks both place a high level of emphasis on faithful representation and relevancy of information. However, there are some differences. For example, GAAP still incorporate the concept of conservativism, a concept which has now been omitted from the IFRS framework as the organisation is linked towards a greater level of emphasis on relevancy, transparency, and adoption of measures to encourage fair market value (Macve, 2015). The IFRS approach pays specific attention to the level of relevancy between different countries, whereas the GAAP is focused only on the U.S. environment,

IFRS 2-3 the use of the term use the term 'financial position' to mean the balance sheet which is found in GAAP, as the statement shows the 'current' position of the firm (at the time the accounts were prepared), and rather than use the term common stock, which is found in GAAP, the term ordinary share capital is used.

IFRS 3-1 has m arerms, as it increases the requirements placed on publicly traded firms, any issues that would need to be considered by the SEC before fully transitioning from GAAP to IRFS (Tarca, 2004). Firstly, there would need to be major thrust for education, so that those professionals working in accounting understand the new requirements, which may have a significant cost to firms (Ampofo & Sellani, 2005). The accounting software industry would have to have sufficient time to make the adjustments required. There are also consideration for the existing educational establishments providing training and qualifications, where there would need to be major changes; rewriting courses and adjusting the exams, accommodating those who are already partly qualified. For all of these changes there are like to be high costs, which may also prevent investments in other areas.

IFRS 4-1 revenue reflects the fundamental differences between the principles and prescriptive based approaches. Under IFRS, with revenues recognised when they are earned, as long as they are deemed to be realisable (Pwc, 2015). By comparison, GAAP has a more fragmented approach, with diverging revenue recognition rules based on different industries. Theoretically, two companies with exactly the same cash flows may recognise their revenues at different points if they operate in different industries.

IFRS 4-2 sees gains and losses recognised immediately under other comprehensive income, but they are not reported on the income statement. Under GAAP gains and losses are you are able to be recognised as one within a specific reserve. The standard gives the company's choice, where they can immediately recognise again often income statement, or allow for a delayed recognition using a corridor approach. Neither of these choices are available within IFRS (Pwc, 2015).