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US GAAP vs International Financial Reporting Standards

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Abstraction

For the concern universe. particularly those in the accounting field. a major issue has risen in recent old ages associating to the differences between the United States By and large Accepted Accounting Principles ( US GAAP ) and the International Financial Reporting Standards ( IFRS ) . Presently. the bulk of states in the universe ( more than 100 states ) follow IFRS guidelines ; nevertheless. the United States still uses GAAP. This subject has become a chief subject of treatment as there is a program for convergence between the two models in the close hereafter.

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The United States accounting system will undergo drastic alterations when this occurs. but the terminal consequence is intended to simplify the accounting processs around the universe.

“Through these undertakings. some covering major constituents of the fiscal statements. the boards intend to better fiscal coverage information for investors while besides alining the US and international accounting criterions. These undertakings are a important move toward accomplishing a common accounting model. a necessary measure in the globalisation of concern and investment” ( “US GAAP vs.

IFRS: The basics” . 2010 ) . The chief difference between US GAAP and IFRS is that US GAAP is well rule-based. where IFRS is more principal-based which means IFRS has room for reading. There are excessively many specific differences to cover in a short presentation. nevertheless. an account of a select few major differences are discussed herein. A treatment of some of the advantages and disadvantages for the world-wide convergence of accounting criterions are included. every bit good.

Keywords: US GAAP. IFRS. Convergence Project. FASB. IASC

US GAAP VS IFRS

In our current planetary economic system. fiscal coverage requires operators to understand the accounting patterns used by the company. the linguistic communication of the state in which the company exists. the currency utilized by the company to fix its fiscal statements and how to pull investors and creditors to put in or impart money to their company.

It is non surprising that many people who follow the development of world-wide accounting criterions today might be confused and frustrated. Convergence is a high precedence on the dockets of both the US Financial Accounting Standards Board ( FASB ) and the International Accounting Standards Board ( IASB ) . Merriam-Webster defines convergence as “moving toward brotherhood or uniformity” ( Gove. Webster’s 3rd new international lexicon of the English linguistic communication. unabridged. 1993 ) . However. there is much treatment of the many differences that exist between US GAAP and International Financial Reporting Standards ( IFRS ) . This suggests to many people. that the two accounting models continue to talk linguistic communications that are worlds apart. This evident contradiction has prompted some to inquire merely how different are the two sets of criterions? Where do the differences exist. why do they be. and when. if of all time. will they be eliminated?

In the usher. “US GAAP v. IFRS: The basics” a expression is taken to try to reply these inquiries and supply an overview. by accounting country. of where the criterions diverge. While the US and international criterions do incorporate differences. the general rules. conceptual model and accounting consequences between them are frequently the same or similar. even though the countries of difference seem to hold overshadowed these similarities. Any treatment of this subject should non lose sight of the fact that the two sets of criterions are by and large more likewise than different for most normally encountered minutess. with IFRS being mostly. but non wholly. grounded in the same basic rules as US GAAP.

No study or publication that compares these two wide sets of accounting criterions can include all the differences that could originate in accounting for the assorted concern minutess that could potentially happen. The being of any differences depends on a assortment of specific factors including: the nature of the entity/business. the elaborate minutess it enters into. its’ reading of the more general IFRS rules. its industry patterns. and its accounting policy elections ( “US GAAP vs. IFRS: The basics” . 2010 ) . Let us concentrate on a choice few of the most normally found differences in present pattern. In add-on. we will discourse the disadvantages and advantages of the pending convergence of these two accounting models.

Background

US GAAP

Since 1973. the Financial Accounting Standards Board ( FASB ) has been designated as the constitution of fiscal accounting that regulates the readying of fiscal studies by non-governmental entities. These criterions are identified as important by the Securities and Exchange Commission ( SEC ) who has the authorization to establish fiscal accounting and coverage criterions for publically held companies under the Securities Exchange Act of 1934 ( “Facts About FASB” ) . The United States By and large Accepted Accounting Principles ( US GAAP ) is considered a more regulations based system of accounting.

IFRS

The International Accounting Standards Committee. formed in 1973. was the first international standards-setting organic structure. It was reorganized in 2001 and became an independent international criterion compositor. now known as the International Accounting Standards Board ( IASB ) . Since so. the usage of international criterions has progressed. “As of 2013. the European Union and more than 100 other states either require or allow the usage of international fiscal coverage criterions ( IFRSs ) issued by the IASB or a local discrepancy of them” ( “International Convergence of Accounting Standards- A Brief History” ) . The IFRS is more principal-based which means there is room for reading. It can be said or argued that by being more rules based. the IFRS represents and captures the economic sciences of a dealing better than U. S. GAAP.

Differences

INCOME STATEMENT

While each model requires presentation of an income statement as a primary statement. there are some major differences in the manner points are handled. The three chief differences are the existent format of the income statement. the handling of exceeding points and besides how extraordinary points are handled ( Dharma Putra. “IFRS Vs GAAP: Balance Sheet and Income Statement” . 2008 ) .

_FORMAT OF THE INCOME STATEMENT_

Under IFRS. there is no prescribed format for the income statement. The company should choose a method of showing its disbursals by either map or nature ; this can either be. on the face of the income statement. or in the notes. Extra revelation of disbursals by nature is required if functional presentation is used. IFRS requires a minimal presentation of the undermentioned points on the face of the income statement: gross. finance costs. portion of post-tax consequences of associates and joint ventures accounted for utilizing the equity method. revenue enhancement disbursal. post-tax addition or loss attributable to the consequences and to re-measurement of discontinued operations and net income or loss for the period ( Dharma Putra. “IFRS Vs GAAP: Balance Sheet and Income Statement” . 2008 ) .

Under US GAAP ; presentation is in one of two formats. Either. a single-step format where all disbursals are classified by map and are deducted from entire income to give income before revenue enhancement ; or a multiple-step format where cost of gross revenues is deducted from gross revenues to demo gross net income. and other income and disbursal are so presented to give income before revenue enhancement. SEC ordinances require registrants to categorise disbursals by their map. Sums attributable to the minority involvement are presented as a constituent of net income or loss ( “US GAAP vs. IFRS: The basics” . 2010 ) .

_EXCEPTIONAL OR SIGNIFICANT ITEMS_

Under IFRS ; the separate revelation is required of points of income and disbursal that are of such size. nature or incidence that their separate revelation is necessary to explicate the public presentation of the company for the period. Disclosure may be on the face of the income statement or in the notes. IFRS ; does non utilize nor does it specify the term exceeding points. Under US GAAP ; the term exceeding points is non used. but important points are disclosed individually on the face of the income statement when geting at income from operations. every bit good as being described in the notes ( “US GAAP vs. IFRS: The basics” . 2010 ) .

_EXTRAORDINARY ITEMS_

Under IFRS. they are prohibited. Under US GAAP. these are defined as being both infrequent and unusual. Extraordinary points are rare. Disclosure of the revenue enhancement impact is either on the face of the income statement or in the notes to the fiscal statements ( “US GAAP vs. IFRS: The basics” . 2010 ) .

EARNINGS-PER-SHARE

UNDER IFRS. THE EARNING-PER-SHARE CALCULATION DOES NOT AVERAGE THE INDIVIDUAL INTERIM PERIOD CALCULATIONS. WHEREAS UNDER U. S. GAAP THE COMPUTATION AVERAGES THE INDIVIDUAL INTERIM PERIOD INCREMENTAL SHARES ( FORGEAS. “IS IFRS THAT DIFFERENT FROM U. S. GAAP? “ . 2008 ) .

Inventory

Under IFRS. LIFO ( last in first out ) . a historical method of entering the value of stock list. a house records the last units purchased as the first units sold or to be used. Under U. S. GAAP. companies have the pick between LIFO and FIFO ( foremost in first out ) . a common method for entering the value of stock list.

Intangibles

Intangible assets are things like research and development and advertisement costs. Acquired intangible assets under U. S. GAAP are recognized at just value. while under IFRS. it is merely recognized if the plus will hold a future economic benefit and has measured dependability. ( “US GAAP vs. IFRS: The basics” . 2010 ) . The intervention of acquired intangible assets helps exemplify why IFRS is considered to be more rules based.

Convergence

Convergence is a high precedence on the dockets of both the US Financial Accounting Standards Board ( FASB ) and the International Accounting Standards Board ( IASB ) . The FASB and the IASB have been working on a joint venture known as the convergence undertaking. This undertaking was announced in 2002 ; its intent is to better and meet US GAAP and IFRS. “As of 2013. Japan and China were besides working to meet their criterions with IFRS’s. The Securities and Exchange Commission ( SEC ) systematically has supported convergence of planetary accounting criterions. However. the Commission has non yet decided whether to integrate International Financial Reporting Standards ( IFRS ) into the U. S. fiscal coverage system. The convergence undertaking has yet to be completed ; in the interim. more and more states are running towards the IFRS since it is more dependable and relevant” ( “International Convergence of Accounting Standards- A Brief History” ) .

ADVANTAGES OF CONVERGENCE

Conversion to IFRS offers many benefits to companies. “The most obvious and good facet of following IFRS is consistence. Public companies in over 100 states are utilizing IFRS and Canada is on path to follow the new system” ( Fellman. “The benefits and drawbacks of transition from GAAP to IFRS” . 2009 ) . It seems merely logical that the United States should make the same. “Additionally. if a company has foreign operations. accommodating IFRS would give them more internal consistence. They would be able to do their fiscal studies uniform which can cut down costs because all coverage will be done the same manner. This will let them to streamline their operations. coverage criterions. scrutinizing. preparation. development and company criterions. Whether domestic or planetary. this streamlining. one time put in topographic point in all of a companies’ offices. will ensue in precise and consistent company records and coverage.

If IFRS version is ruled to be optional before a set day of the month. a company can derive a big advantage if they were to follow the coverage criterions early. because they would be giving themselves a head start on utilizing and going familiar with the system. Harmonizing to Stanley Todd. “By following IFRS. a concern can show its fiscal statements on the same footing as its foreign rivals. doing comparings easier. Furthermore. companies with subordinates in states that require or permit IFRS will be able to utilize one accounting linguistic communication company-wide. Companies besides may necessitate to change over to IFRS if they are a subordinate of a foreign company that must utilize IFRS. or if they have a foreign investor that must utilize IFRS. Companies may besides profit by utilizing IFRS if they wish to raise capital abroad” ( Todd. “The Convergence of International and U. S. Financial Reporting Standards” . 2008 ) .

DISADVANTAGES OF CONVERGENCE

It goes without stating that along with benefits come drawbacks. Changing to IFRS from US GAAP is non merely a alteration in accounting process. The U. S. will hold to pay a batch of money in the procedure of change overing. Some of these costs include work force preparation. forces readying. and full system alterations. Once a company makes the determination to alter to IFRS. it must to be a entire transmutation. “Additionally. because IFRS is different to US GAAP. it would be good for companies to engage fiscal advisers and staff that are knowing in IFRS as they will be able to assist steer the company through its conversion” ( Fellman. “The benefits and drawbacks of transition from GAAP to IFRS” . 2009 ) . Hiring this new staff will increase costs and besides makes layoffs and staff cutbacks really possible. Companies will most probably besides have to upgrade their engineering and computing machine plans for the alteration from US GAAP.

All studies. fiscal paperss. contracts and understandings will hold to be revised since they were originally drawn up under US GAAP criterions. Finally. companies will incur extra costs for the hearers and advisers needed for the initial conversion” ( Fellman. “The benefits and drawbacks of transition from GAAP to IFRS” . 2009 ) . This disbursal would most probably be a erstwhile disbursal. This blunt alteration would impact the delivery/operations side of the concern with regard to how contracts are written with both clients and vendors/suppliers ( Forgeas. “Is IFRS That Different From U. S. GAAP? ” . 2008 ) . The top to all of these disbursals is that they could turn out to be helpful by cut downing net income and hence cutting down on revenue enhancements paid by the companies.

Summary

The U. S. by and large accepted accounting principal ( US GAAP ) and international fiscal describing criterion ( IFRS ) are criterions regulating how economic events are reported. In the United States. the Securities and Exchange Commission ( SEC ) relies on the FASB. the accounting standard-setting organic structure of the U. S. . to develop accounting criterions that public companies must follow when printing fiscal statements. On the other manus. many states outside of the United States have adopted the International Financial Reporting Standard ( IFRS ) which is issued by the International Accounting Standard Board ( IASB ) .

In recent old ages. the FASB and IASB have worked closely to seek to minimise the differences in their criterions and principals and program to unify the two systems in the hereafter. This paper is intended to give some background of both models. comparison and contrast some of the differences between US GAAP and IFRS. every bit good as. the advantages and disadvantages of the approaching convergence.

Although the statements from both sides of the issue are obliging. programs are already in topographic point for convergence of the criterions by 2015. “Since the alteration from US GAAP to IFRS is inevitable. companies need to concentrate on developing an action program. every bit good as. a clearly defined program for their hereafter as IFRS users. There needs to be a scheme for transition that will let it to travel every bit swimmingly as possible so they can maintain breaks to their day-to-day public presentation at a minimum” ( Fellman. “The benefits and drawbacks of transition from GAAP to IFRS” . 2009 ) .

Cite this US GAAP vs International Financial Reporting Standards

US GAAP vs International Financial Reporting Standards. (2017, Sep 23). Retrieved from https://graduateway.com/us-gaap-vs-ifrs-essay-6524-essay/

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