The term IFRS refers to International Financial Reporting Standards, previously called International Accounting standards (IAS).
These are issued by the International Accounting standards Board (IASB), which is a subsidiary of the International Federation for Accountancy profession (IFAC).
The ACCA textbook on audit and assurance describes IFAC as “a global organization with more then 160 member bodies. Since IFAC and IASB are simply a grouping of several accountancy bodies, the IASB on its own does not have a legal standing on national level.
It cannot enforce compliance with its standards and thus it requires co-operation of national standard setters. ” (FTC Kaplan, 2008).
Therefore IASB works in conjunction with major national standard setting bodies, which includes the UK Accounting Standards Board and the US financial accounting Standards Board. The term GAAP on the other hand stands for Generally Accepted Accounting Practices. “It includes accounting guidelines, rules, conventions and detailed procedures for financial reporting, that are considered as accepted practice in a country”(wordnetweb).
GAAPs, unlike IFRSs, are not intended to be universally applicable. They are specifically tailored to suit national and even industrial needs. So, US GAAP would differ from Japanese GAAP, for instance. The US GAAP standards are issued by the Financial Accounting Standards Board (FASB) and the compliance of financial reports with these standards is mandated by the Securities and Exchanges Commission. Since the IFRS and the US GAAP are based on different underlying frameworks and follow different approaches to accounting, several differences in the accounting treatments arise as a consequence.
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The following text examines some of the broad differences between IFRS and US GAAP, and the impact of theses differences on decision making. Principle-based VS Rule-based The US GAAP and the IFRS follow different approaches to accounting. The IFRS follows the principle-based approach. It is based upon a conceptual framework provided by the IASB which is a logical and organized system of interrelated principles and objectives. It defines the nature, function and limitations of financial accounting and financial statements.
It provides the basis for determining the specific treatment of the items in financial statements so that the actual treatment addresses the circumstances surrounding the transaction. US GAAP, on the other hand, follow the rule-based approach, also referred as the cookbook approach. It provides detailed sets of stringent rules and accounting treatments specific to the transaction and to particular situations. Accounting standards under this approach are formulated in response to specific problem or abuse, in a piecemeal way. This can cause inconsistencies between different accounting standards as well as between standards and the legislation.
Moreover, the absence or lacking of conceptual framework may mean that the standards will fail to address all of the critical issues, especially with the increasing complexity of transactions and increasing sophistication of businesses. So, basing the accounting standards on principles and a conceptual framework not only enhances international interpretation of statements but also makes them more difficult to circumvent as well as reduces the risk of the standard setting process being influenced by large companies and business sectors (vested interests).
Moreover, using a conceptual basis for setting standards means that interpretation of financial results will be facilitated on global scale, providing foreign stakeholder and investors with a clearer picture of the companies’ state of affairs and performances. Interim reporting US GAAP considers the interim as an integral part of annual period, which lead to the deferral of certain cost that fall in more than one interim. Whereas, the IFRS view each interim as a separate accounting period. Business combinations
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 ... which will guide in setting future standards. Convergence between U. S GAAP and IFRS do not mean accounting standards should become identical. It means that ...
The decision of whether to consolidate an investee as a subsidiary, under IFRS, depends on the power to govern investee’s operating and financial policies. Whereas the US GAAP requires application of the ‘two-tiered considerations model’, applying variable interest model followed by voting control model that involves complex criteria for evaluation. It allows a number of exceptions that enable companies to adopt off-balance sheet treatment in certain situations. The approach prescribed by IFRS therefore results in increased consolidation.
The revised IFRS 3 (business combinations) the parents must effectively lose control or prove that the relationship with subsidiary faces severe long term restrictions, in order to win exclusion. This has significant impact on how the potential shareholders view the company as it improves the transparency of company’s affairs, the parent company will be required to disclose transactions and financing arrangements with the consolidated subsidiary (related party transactions).
Presentation and measurement of minority interest:
Further more, the minority interest are presented inside equity but as a separate component whereas US GAAP requires minority interest to be disclosed outside the equity. The Minority interests, US GAAP, are measured at Fair value, which includes their share of Goodwill. The IFRS however, allows a choice between valuation of subsidiary at fair value including goodwill and the valuation at proportionate share of investee’s net identifiable assets, which excludes goodwill. Significant events arising between different reporting dates:
US GAAP requires disclosures in the financial statement for significant events that occur between different reporting dates of the parent and its subsidiaries, whereas, the IFRS requires adjustments in the financial statements for such events. Method of accounting for subsidiaries: US GAAP allows entities a choice between equity-method and Fair value model when accounting for investments in other entities, with no requirement to apply uniform accounting policies. Whereas, under IFRS entities are required to apply equity-method when producing consolidated statements.
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And IFRS mandates the application of uniform accounting policies throughout the group of consolidated entities. Revenue Though the guidance provided by IFRS and US GAAP in respect of revenue recognition is similar in may respect, however, the US GAAP rules are more detailed and usually industry-specific. The IFRS on the other hand provides two fundamental standards, accompanied by a couple related interpretations that cover entire revenue transactions, with no industry-specific exceptions.
The differences in of US GAAP and IFRS in respect of treatment for provision of services broadly and the allocation of consideration to components of ‘multiple deliverable arrangements’ will affect the timing of recognizing revenue. The IFRS guidance on treatment consumer loyalty programs may result in significant differences. Moreover, US GAAP allows the use of Incremental-Cost Model, which is prohibited under IFRS. Expenses Share-based payments: Expense recognition may be accelerated for companies, issuing awards which are ratably vested over a period ( say, 30% per three year period), under the IFRS and the total amount would also differ.
Further, the tax expense attributable to share based payment is likely to be less variable under US GAAP than under IFRS The differences between the two frameworks as regards to the categorization of an award, as part of equity or as liability, give rise to considerable differences in the earnings volatility, since awards treated as part of liabilities require continuous adjustments to valuation, through earnings, in each accounting period Employee benefits:
US GAAP does not allow any separation in components of net pension cost whereas the IFRS allows certain parts of net pension cost to be separated, which may then be disclosed under financing costs included in the statement of operations. Moreover, there are different restrictions, under IFRS, over the valuation of assets, for estimating returns on assets of employee benefit plan. Inventory Methods of costing: US GAAP allows the LIFO method (where the latest items are recorded first) and there is no explicit requirement for consistent application, of chosen method, for all similar inventory items.
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On other hand, the IFRS prohibit the use of LIFO as a costing method and require consistency in application of chosen method of costing. Measurement: Under US GAAP Inventory is valued at lower of Market or Cost whereas according to IFRS inventories must be valued at lower of net realizable value, which is an estimate of the amount that can be realized and which may not be equally to the fair value. Inventory write-down reversals: IFRS allows the reversal of impairment losses recognized in previously, to the extent of original loss when there are no reasons for impairment.
A write-down under US GAAP however, gives rise to a new cost basis which cannot be reversed. Long life assets Revaluation: US GAAP prohibits the revaluation of non-current assets, which allowed by IFRS with a requirement of revaluating assets on regular basis, if election for revaluation is made in the first place. Measuring borrowing costs: Under US GAAP costs arising from differences in exchange are not considered a part of eligible borrowing costs and any interest earned on investment of borrowed amounts cannot generally be set against interest costs incurred during a period.
Whereas, the IFRS allows the inclusion of exchanger rate difference in eligible borrowing cost and the setoff of borrowing costs against investment income earned on it. Moreover, borrowing costs associated with particular qualifying assets are capitalized under IFRS. Whereas, the amount capitalized, under US GAAP, are calculated by multiplying the borrowing rate with borrowing costs (which is the weighted average accumulated expenditure) Depreciation of components of asset: The IFRS require depreciation of asset on component basis if the patterns of economic benefits expected from the components of asset are different.
Though the US GAAP permits such treatment, yet it is an uncommon practice. Investment properties: US GAAP dose not provide a separate definition for investment properties. Therefore they are either classified as ‘held for sale’ or ‘held for use’. The IFRS in contrast separately identify investment properties, under IAS 40, as non-current assets held ‘for capital appreciation’ or ‘to earn rental income’, providing a choice between historical-cost model and fair value model, to account for such properties.
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