Differences in IASB and FASB standards across industries

IASB/FASB

The IASB is the International Accounting Standards Board, while the FASB is the Financial Accounting Standards Board. The IASB is an "independent, not-for-profit private sector organization" that sets accounting standards for the international community. IASB standards are widely accepted worldwide, but not in the U.S.A., Canada and a handful of other nations that have their own set of accounting standards. The IASB issues what are known as international financial reporting standards (IFRSs) that are to be used in the preparation of financial statements by firms in countries that use the IASB as their accounting governing body (IASB.org, 2010).

The FASB is the U.S. version of the IASB. The FASB has been in place since 1973 and has been assigned by the Securities Exchange Commission (SEC) the task of setting accounting standards for the preparation of financial statements for public corporations. The FASB does this through its accounting standards codification, which includes rules, interpretations and clarifications (FASB.org, 2010). Thus, both boards serve roughly the same function, but the IASB applies to a number of different countries around the world while the FASB applies to U.S. firms. Foreign firms that are co-listed on a domestic exchange and a U.S. exchange often need to produce duplicate sets of statements, each adhering to a different set of accounting principles.

There are a number of differences between IASB and FASB. For example, a manufacturing firm will note that there are significant differences in the way research and development is treated. Under GAAP, R&D is considered to be an operating expense. This has significant impacts for firms with long R&D lead time, such as those in the pharmaceutical or automobile industries. Under IASB, research and development generally allows the capitalization of research and development costs. This will directly impact both the income statement and the balance sheet of any manufacturing company in the U.S. should capitalization be allowed (Hughes & Sander, 2007).

For a service firm, one of the biggest differences is with the treatment of leases (sites for restaurants or airplanes for airlines, for example). The treatment of gains of sale and leaseback transactions that result in an operating lease are treated differently. Under GAAP, these are amortized over the life of the lease while under IFRS the gain is recognized at the time of the sale and leaseback. This can impact the income statement of the service firm in that GAAP allows for better matching of the transaction and its effects while the IFRS treatment results in a greater temporal distortion of the transaction's impacts (Hughes & Sander, 2007).

For a retail firm, there are differences in the treatment of inventory. For example, whereas GAAP permits the use of LIFO in measuring inventory, this is not allowed under IFRS. Another difference in the treatment of inventory between the two sets of standards is with respect to inventory writedowns. Under GAAP, reversal of an inventory writedown is not permitted. Under IFRS, reversal of an inventory writedown is permitted. If the writedown has been recognized in previous years, the reversal can be conducted through the income statement of the year in which the reversal occurs, not the year in which the initial writedown occurred (Lajara, 2008).

There are significant differences between cash accounting and accrual accounting. Cash accounting has transactions recorded in accordance with the timing of the cash flows. By contrast, the accrual method has transactions recorded in accordance with the timing of the transaction itself. The cash method is simple and easy to understand. However, it also can lead to significant distortions and that makes it unsuitable for financing reporting. For example, a massive sale at the end of the year would not be recorded if the payment for the sale was not received until the following year. This makes the first year look worse than it actually was (since most of the work that went into generating the sale took place in that year) and the second year look better than it actually was (since no work from that year went into the sale).

In addition to revenue recognition, the differences manifest themselves in many other aspects of accounting, such as inventories, accounts receivable (would these even exist under cash accounting?) and capital purchases. In financial reporting, accrual accounting allows for the creation of the statement of cash flows that provides a sense of the different flows over the course of the year. Cash accounting systems, however, have a more difficult time reconciling the different accrued transactions. Again, this is a weakness in cash accounting and is one of the reasons why only accrual methods are used in the preparation of financial statements.