Difference Between IFRS and US GAAP

¶ … IFRS and U.S. GAAP

The U.S.' GAAP and the IFRS serve the same functions. IFRS and U.S. GAAP provide a system of principles of accounting, which is used to draft financial statements. IFRS is used among countries in the developed world while GAAP is used in the United States. While many organizations defining IFRS and U.S. GAAP intend to merge the two standards, they are notable differences. The U.S. Exchange and Securities Commission has established many differences in various areas of application between IFRS and U.S. GAAP. The prime differences stem from the way the two frameworks have been structured, the definition of liabilities and assets, the presentation of financial statements and revenue recognition.

a) What is IFRS? What is U.S. GAAP?

IFRS is defined as the principles-based interpretations, standards, and framework embraced by the International Accounting Standard Board (IASB). Most standards comprising sections of IFRS are historically known as International Accounting Standards (IAS). They were issued in the early 1970s and the new IFRS took over the responsibility of setting international standards of accounting. Since then, IFRS has continued to create more standards to govern the accounting field. The GAAP refers to the framework of guiding standards for financial accounting used in various jurisdictions known as accounting standards. GAAP entails the conventions, rules, and standards accountants adhere to in recognizing and summarizing transactions. They also use this framework to prepare any financial statement.

b) Which approach best serves the objectives of SFAC #8?

Statement of Financial Accounting Concepts (SFAC) has developed a conceptual framework, which serve as a ground for all IFRS pronouncements. While GAAP does not serve all the six SFAC, IFRS also does. These principles offer a ground for concepts of financial accounting for non-business and business enterprises. SFAC has also created a conceptual framework for IFRS. Significant differences between GAAP and IFRS have been established. SFAC has established a difference in how GAAP and IFRS serve its objectives. The goal of SFAC No. 8 is to give financial information regarding the reporting entity, which is valuable to users of the financial report. This helps them make decisions concerning the provision of resources to the reporting entity. In U.S. GAAP, statements of comprehensive income are portrayed as an independent column in the owner's equity statement. Such a presented is prohibited by SFAC. SFAC demands that the separate presentation of accumulated comprehensive income be part of the owner's equity statement. IFRS has been at the forefront in advocating for this; hence serving the main objective of SFAC.

c) What are the primary differences between the IFRS and U.S. GAAP approaches?

There are key differences between IFRS and U.S. GAAP in terms of their basic premise. At the most basic level, U.S. GAAP appears to be much of a rule-oriented system while IFRS is much principle oriented. This difference is seen to be more challenging than it appears. Most finance and accounting professionals in the United States have been educated in the U.S. GAAP rules. The overall lesson from their years of work and school is that if they have an issue, they should look it up. Within U.S. GAAP, volumes of guidance attempts seek to address almost all conceivable accounting problems, which are likely to arise. On the contrary, IFRS is a shorter volume standard based on principles. Consequently, IFRS requires involves many decision-making processes, which U.S. accountants are not accustomed to doing.

Firms engaged in the development and exploration of natural gas and crude oil have an option of adopting one of the two accounting approached; IFRS and U.S. GAAP. These approaches differ in terms of how they treat operating expenses related to the exploration of natural gas and new oil reserves.

Other elements worth mentioning include extraordinary items and contingent assets. Contingent assets refer to assets whereby the chances of economic benefits rely on prospective events that cannot be controlled by companies. Because future events are naturally uncertain, these assets do not appear on the balance sheet. Nevertheless, they are present in the financial statement notes of a company. These are assets with rights to a future possible claim and are based on past events. A good example is the possible settlement obtained from a lawsuit. Companies do not adequate guarantee to put the value of the settlement on the balance sheet. As such, companies can only talk about the possibilities in the notes. While GAAP recognizes contingent assets, IFRS does not.

Unique items entail the payment of a lawsuit or sale of the subsidiary. Unique items are categorized as liabilities, which are infrequent or unusual in their occurrence. GAAP supports unique items while IFRS prohibits them. Although infrequent and rare, unique items could be significant and including them might have an impact on a company's financial statements.

d) Which approach best serves the SME community?

IFRS has proven to be serving the best interests of the SME community including multinational corporations. It has generated cost savings and efficiency to companies such as Procter & Gamble as their foreign subsidiaries have incorporated IFRS. For multinational companies, they are already reporting the benefits accruing from the adoption of IFRS. Although some companies have spent more than millions to convert from GAAP to IFRS, this switch has saved them money in the end. Companies using IFRS have gained a strong position in negotiating with credit institutions by decreasing the costs of borrowing. This has been attributed to the positive impact that IFRS has on credit ratings. IFRS has also made it easy for SMEs to implement cross-border acquisitions, initiate partnerships, and create cooperation agreements with overseas entities. All these advantages have bolstered the role of SMEs in the global economy.

The IFRS standard has been beneficial to the SME community, unlike the GAAP: it is disadvantageous to some countries. Critics of GAAP have presented a number of reasons why companies should use IFRS in place of GAAP. In fact, GAAP is uncertain, it does not have enforcement, and it is complex in terms of presenting statements.