This paper examines five interconnected concepts in international and domestic financial reporting: U.S. Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS), the Norwalk Agreement of 2002, Generally Accepted Auditing Standards (GAAS), and International Auditing and Assurance Standards. It explains the purpose and core principles of each framework and how they relate to one another. The paper then applies these concepts to the 2010 annual reports of three multinational corporations — Apple Inc., Nikon Corporation, and Swatch Group — comparing the accounting and auditing standards each company uses and highlighting the key differences between national and international reporting frameworks.
The paper models a define-then-apply structure: each accounting or auditing concept is introduced and explained in Part I, and then each concept is mapped directly onto real corporate examples in Part II. This technique is effective for demonstrating comprehension in business and accounting courses because it shows that the student can both define abstract standards and recognize them in practice.
Part I introduces U.S. GAAP, IFRS, the Norwalk Agreement, GAAS, and International Auditing and Assurance Standards in sequence, closing with a synthesis of how the five concepts relate. Part II applies these frameworks to Apple Inc. (U.S. GAAP / GAAS), Nikon Corporation (Japanese GAAP / Japanese auditing standards), and Swatch Group (IFRS / Swiss and international auditing standards). A comparative table summarizes the findings before the reference list.
U.S. Generally Accepted Accounting Principles (GAAP) are the common accounting principles, standards, and procedures that U.S. companies follow when preparing their financial statements. GAAP represents a combination of accepted standards that companies must follow when recording and reporting their accounting information. For example, GAAP establishes rules that companies must follow when preparing financial data such as balance sheets, revenue recognition, and outstanding shares recognition.
GAAP also mandates that companies maintain consistent, relevant, reliable, and comparable accounting standards. One of the main objectives of GAAP is to help investors achieve a minimum level of consistency when analyzing a company's financial statements.
The four basic accounting principles that GAAP establishes are as follows:
Historical Cost Principle: GAAP requires companies to record assets based on their original acquisition cost.
Revenue Recognition Principle: This principle refers to accrual basis accounting, recognizing revenue when it is earned.
Matching Principle: This principle allows for the evaluation of actual profitability and performance by matching revenues with related expenses.
Principle of Full Disclosure: Companies must disclose all relevant financial information while keeping disclosure costs to a minimum.
Accounting statements that do not follow U.S. GAAP accounting principles may not meet genuine accounting standards (Thornton, 2007).
International Financial Reporting Standards (IFRS) are the accepted international accounting standards that publicly traded companies implement when preparing their financial statements. The aim of IFRS is to create accounting standards that can be applied in both developing and advanced economies. In the contemporary business environment, where companies cross borders to conduct business, an accounting standard recognized in one country may not be applicable in another, because different countries have their own sets of rules governing the preparation of financial statements. Since different countries have different interpretations of business transactions, difficulties frequently arise in the analysis and interpretation of financial statements across nations.
Given these difficulties, investors, business organizations, and regulators are increasingly recognizing the importance of a common international accounting standard in the financial reporting chain (Chakrabarty, 2011). Many countries now believe that incorporating IFRS standards in preparing company financial statements promotes economic growth. As a result, countries have begun allowing business organizations to use IFRS to prepare their consolidated financial statements. For example, the European Union has mandated all companies incorporated in member states to prepare their financial statements in accordance with IFRS. In addition, Australia, New Zealand, and Israel have required incorporated companies in their territories to follow IFRS (AICPA, 2011).
The Norwalk Agreement is a memorandum of understanding signed in October 2002 between the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). Concluded in Norwalk, Connecticut, the agreement established a joint commitment to develop compatible accounting standards that could be used for both domestic and cross-border financial reporting (AICPA, p. 3).
Following the October 2002 meeting, the agreement formalized the convergence of U.S. GAAP and International Financial Reporting Standards (IFRS). In the memorandum of understanding, the FASB and IASB pledged to:
Make existing financial accounting and reporting standards compatible as soon as practicable; coordinate their future work programs to enhance compatibility; and ensure that no significant differences remain between the two sets of financial reporting standards (Wild, 2007).
Generally Accepted Auditing Standards (GAAS) are a systematic set of guidelines that an auditor must follow when conducting an audit of a company. GAAS requires auditors to maintain accuracy and consistency in their audit reports. These standards provide the accepted measure by which an independent auditor plans and reports the results of an audit.
By following GAAS principles, an auditor is better positioned to minimize the omission of material information when auditing a company's financial statements. One standard procedure that auditors must follow is the standard of reporting, by which "the auditor must state in the auditor's report whether the financial statements are presented in accordance with generally accepted accounting principles" (AICPA, 2006). According to GAAS, an auditor must also express an opinion on the overall reliability of a company's financial statements. The purpose of these requirements is to enhance the integrity of corporate financial reporting.
At the international level, the International Auditing and Assurance Standards Board (IAASB) is the independent body charged with setting high-quality international standards on auditing (ISAs) and assurance. The IAASB facilitates convergence in national and international auditing and assurance standards, which "contributes to enhanced quality and uniformity of practice in these areas throughout the world, and strengthened public confidence in financial reporting" (IFAC, 2011, p. 1).
The relationship among all five concepts discussed above is that they collectively aim to enhance the accuracy and reliability of accounting standards. While IFRS and International Auditing and Assurance Standards establish the accounting and auditing principles that companies should follow at the international level, U.S. GAAP, GAAS, and the Norwalk Agreement establish the principles applicable at the national level.
Apple Inc. is a Californian corporation founded in 1977. Apple specializes in the design, manufacturing, and marketing of a variety of devices including computers, portable digital music players, mobile communication devices, and other consumer electronic products. Its product lineup includes the iPhone, iPod, Macintosh computers, the iOS operating system, and a range of accessories.
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