In the United States all publicly traded companies are required to use GAAP (Generally Accepted Accounting Principles) as the laws that regulate their accounting. The reasoning behind U.S. GAAP is so investors can accurately compare one company to another. In America there has been a long history of people who have abused GAAP, and manipulating their numbers so that the company looks more attractive to potential investors. This manipulation then causes a need for GAAP to be added upon more and more, making GAAP law based than based on principals. Currently U.S. GAAP is well over seven thousand pages, with a good amount (about 2,000 pages) being dedicated to industry accounting. The International Financial Reporting Standards, or IFRS, is the international version of U.S. GAAP. It is used by over one hundred twenty countries, and is headed by the International accounting standard Board.
The IASB is seeking to use IFRS to do to the world what GAAP did to the United States, provide common accounting standards so investors can accurately tell the financial position of any publicly traded company. IFRS is principals based rather than law based, consequently IFRS is only about two thousand pages long, then same length that U.S. GAAP uses to detail industry accounting specifications. The problem that has risen is that as countries become more active globally there is an increasing need to have comparability between companies of two different nations. Meaning that an investor cannot accurately compare two companies if one is in the U.S., where the company uses GAAP, and the other company is in another nation that uses IFRS. To solve this problem the Securities and Exchange Commission has already started to introduce IFRS principals into U.S. GAAP, and eventually the U.S. will have to make some transition to allow more compatibly. What are the Main Differences?
The Essay on Public Company Accounting Oversight Board Will It Protect Investors
Public Company Accounting Oversight Board; Will it Protect Investors? The Public Company Accounting Oversight Board (PCAOB) was created by Sarbanes-Oxley Act of 2002. This board was created to oversee the audit of public companies, subject to the securities laws, in order to protect the interests of investors (15 USC 7201, 2002). It was created in wake of the recent financial scandals of Enron, ...
Revenue recognition under U.S. GAAP has become increasingly industry specific due to some industries take on the matching principal. The matching principal states that revenue and expenses must be recorded in the period that they are earned. An example of how this principal can be misapplied is Apple’s software updates. Apple is a highly successful technology company that has designed their own software to be run on their products. This software has periodic updates that Apple provides for free after the purchase of their products. The issue that Apple had is that upon the sale of one of their units Apple deferred some of that income because it was unearned, and would then recognize some of the income each time there was a software update because then it would become earned. The Financial Accounting Standards Board (FASB) then had to make an industry specific rule that relates to software updates; now a company can only defer income for so long before it is required to be recognized.
IFRS takes a different approach to revenue recognition. It has very little industry specific guidance, because its principals based approach is to be taken across all entities and industries. IFRS states that once there is a probable chance that there will be an economic benefit for goods or services provided and that benefit is measurable, then the company recognizes it as income. Therefore, the main difference between IFRS and U.S. GAAP revenue recognition is timing. Under IFRS it is more likely that revenue will be recognized earlier than it would be under GAAP. Another major difference between GAAP and IFRS that directly affects the balance sheet of a company is nonfinancial assets, or property plant and equipment.
The Term Paper on Hershey History Financial Report Analysis Company Profile
Financial report analysis of Hershey Foods Corporation, Hershey Foods HistoryINTRODUCTIONHershey Foods Corporation is engaged, with its subsidiaries, in the manufacture, distribution and sale of confectionery and grocery products. The Company's principal product groups include confectionery products sold in the form of bar goods, bagged items and boxed items, as well as grocery products in the ...
The concept of historical cost is the driving force behind the book value of fixed assets within U.S. GAAP. Historical cost is essentially the price paid for the asset listed, and then the book value of the asset is historical cost less depreciation. IFRS allows for two methods of listing book value for fixed assets: the cost method (which is the same as GAAP) and the revaluation method. The revaluation method allows the company to have an asset appraised, and then if appraised for a higher value the company is permitted to write up the book value of that asset. The historical cost method allows for assets to written down, but never up. While the ability to write up assets could be a valuable opportunity for the company to make their value seem higher, management has to weigh the cost of having the assets appraised against the possible economic benefits that would take place from the increased reported value.
One other concept that affects the balance sheet is the concept of componentization. Componentization is separating assets that could be considered one asset. An example of this is separating the air conditioning unit and air ducts, from a building, and then listing it as its own asset. While GAAP allows componentization it is not required and is almost never used. It is much easier for a company to capitalize a less valuable asset into the whole of a larger asset. IFRS, on the other hand, requires componentization to be used.
Inventory can be handled three ways under GAAP; the first-in first-out method (FIFO), where the price of the first inventory units into the business are the first ones that are recorded out, the last-in first-out (LIFO), which is the opposite of FIFO, where the cost of the last inventory units to be received are the first ones to be record out, and the last method is the weighted average, in this method the cost of all the inventory units are averaged and then that averaged amount is recorded as the cost of inventory being sold. IFRS allows the use of the FIFO and weighted average methods, but does not allow LIFO as a viable method to be used. This difference could have a large impact on the reported operating results of a company, as well as a significant effect on the tax liability of reporting companies. (IFRS and US GAAP, 2012)
The Homework on Economic and Accounting Assets
The market price reflected in a transaction between two independent parties provides objective evidence of the cost of assets acquired or the market value of assets sold. It is useful for accountants to rely on objective evidence of economic value other than a long-ago actual market transaction. In the past, accountants have chosen to rely on actual market transactions. This reliance tended to ...
IFRS Adoption in Other Countries
The Czech Republic has recently made the transition from Czech GAAP to IFRS. The Czech Republic had to make to make the shift in order to become a part of the European Union, which requires all member countries to adhere to certain financial standards, not the least of which being the adoption of IFRS. There were many challenges that the Czech Republic faced with its transition of accounting standards. One of the main challenges was the affect that IFRS had on the primary users of financial statements, which are tax professionals and lenders. Later IAS (International Accounting Standards) were not relevant for tax purposes, and therefore could have be considered an undue burden upon preparers. Another challenge was the lack of professional knowledge. There is an absence of a developed accounting profession to interpret and apply many aspects of IFRS in the Czech Republic. There were a few large Czech companies that voluntarily adopted IFRS early, and they had many difficulties, the largest one being accounting for funding that was received from overseas investors. The last challenge that the Republic faced was the country’s Ministry of Finance.
The Ministry of Finance was reluctant to share its regulatory power with any other governing body, which slowed down the implementation process and casted doubt on whether or not there would be any benefit with the new standards beyond the tax profession. (Sucher & Jindrichovska, 2004) In 2007 China started to require that companies use IFRS-convergent accounting standards. There were many concerns about China adopting IFRS accounting, mainly that IFRS was created primarily by the western society with western ideals. IFRS was created with the idea of working in an economy that is directed by demand, and companies are shareholder oriented; however, China is different than most developed countries in that China tends to follow a traditional economic policy of reliance upon uniform codes, and it had yet to be determined whether or not IFRS would effectively allow Chinese companies to report accurate financial statements. After Chinese firms started producing reports with IFRS accounting an analysis was done to determine how accurate their reports were. Since the adoption of IFRS-convergent accounting standards the quality of accounting has significantly improved. Such results have led to the belief that China’s now advanced economy can be regulated by IFRS and accurately report financial activity. (Chunhui, Lee, Nan & Ling, 2012)
The Essay on IFRS Vs U.S. GAAP
There are two sets of accounting standards that are used worldwide. One is the International Financial Reporting Standards (IFRS) and the U.S. Generally Accepted Accounting Principles (GAAP). There is a huge desire for there to one set of accounting standards worldwide with the increase of companies performing business in many different countries and global expansion. The International Financial ...
IFRS and the United States
The SEC stated in 2010 that IFRS was in the best position to become the world standard for accounting, and that its staff would continue to evaluate IFRS to determine when and how the US would adopt the international standard. It was expected for the SEC to make its statement regarding its evaluation in 2011; however, 2011 has come and gone with no word from the SEC. In the SEC’s evaluation they looked at different areas within IFRS. IFRS would have to be very high in quality if it were to ever be adopted by the U.S., and there are a few areas which the quality is questioned. IFRS is does not have any specifications for different industries, which some would argue is a sign of poor quality. IFRS also allows for more “judgment calls” by the accountant, since IFRS is principals based, which could create an environment for opportunistic accounting to grow and take advantage of the accounting standards. The main benefit of the U.S. adoption of IFRS would be the increased comparability between U.S. companies and companies around the world. Although, this increased comparability means nothing unless the investor can interrupt the financial statements.
Current U.S. investors are accustomed to statements reported under U.S. GAAP, and if IFRS comes the method of accounting investors would have to learn how to read and interpret the new reports. Part of the SEC’s evaluation includes determining investor’s current knowledge of IFRS and how they might have to adapt to the new reporting standards. There are four possible outcomes for the future of U.S. GAAP and IFRS. The first outcome is that U.S. GAAP and IFRS will remain as separate accounting standards as they are now, but would hopefully become more similar as time progressed so that someday in the future U.S. GAAP would essentially be a US version of IFRS with few substantial differences.
The Essay on Are financial accounting statements useful to investors?
1.1 IntroductionFinancial accounting statements are summaries of monetary data about an enterprise and are used in an attempt to help make informed decisions in the present and future.Financial statements portray the effects of transactions and other events by grouping them into broad classes (or elements) according to their economic characteristics.The three basic financial statements are the ...
One issue with this outcome is that U.S. multinational firms would most likely want to file with the SEC under IFRS so that they could use one accounting standard throughout their company. The SEC probably would not allow this because it would create inconsistencies for US investors looking to invest into domestic businesses. The second outcome would be that the US starts to incorporate aspects of IFRS into GAAP so much so that they are almost one in the same, with the only differences being because of the U.S.’s differences in capital markets, political and economic environments, and regulations. Under this outcome there is a possibility that all companies, foreign and domestic, would have to file with the SEC under the IFRS-U.S. GAAP hybrid during the transition period in order to increase comparability of reports for that time.
The third outcome is that the SEC allows U.S. companies to use IFRS and U.S. GAAP. This outcome would present a problem because then there would be two different accounting methods, which would result in financial statements losing their comparability. The last outcome is that the SEC requires that U.S. companies use IFRS. This of course would drastically change the accounting profession within the United States, and the way U.S. investors decide investments. However, the last outcome is the only outcome that guarantees comparability between financial statements in different nations. (Poon, 2012)
Conclusion
Currently there are significant differences between IFRS and U.S. GAAP. These differences decrease the comparability of financial statements that are issued in the U.S. and those from other nations. As investors continue to become more globally involved there is a greater need for a single set of global accounting standards in order to maintain consistency. There are many possible outcomes for whatever decision the SEC decides upon to resolve the issue, but one thing is clear; that sometime in the near future there will be a shift in accounting standards to satisfy the needs of investors.
References
Chunhui. L., Lee. Y., Nan. H., Ling. L. (2012).
The Impact of IFRS on Accounting Quality in a Regulated Market: An Empirical Study of China. Journal of Accounting, 659-676. Retrieved from http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?sid=46246d93-6c2f-4d1d-9dbd-4c7edd1dac41%40sessionmgr111&vid=4&hid=126 IFRS and US GAAP: similarities and differences. PricewaterhouseCoopers online. Retrieved from http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaap-similarities-and-differences.jhtml
The Essay on IFRS and GAAP Accounting Principles
IFRS is also referred to as International Financial Reporting Standards. They are set of standards of accounting developed by International Accounting Standards Board (IASA). They are becoming the standards in the globe to be used for preparation of financial statements for the public companies. IASB is independent body which sets accounting standards which is based in London (McLaughlin, 2009). ...
Poon. W. (2012).
Incorporating IFRS Into The U.S. Financial Reporting System. Journal of Business & Economics Research, 303-311. Retrieved from http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?sid=46246d93-6c2f-4d1d-9dbd-4c7edd1dac41%40sessionmgr111&vid=11&hid=126 Sucher. P., Jindrichovska. I. (2004).
Implementing IFRS: A Case Study of the Czech
