The Generally Accepted Accounting Principles (GAAP) is compared and contrasted with adopt International Financial Reporting Standards (IFRS). Main thesis is that IFRS and GAAP accounting standards are more elaborately evaluated on the basis of differences in order to point out more effectual practices IFRS can adopt from GAAP or vice-versa or consider which is more effective among the two in case of probable weighing global choice for a universal accounting standard later on.Historically, IFRS originated from the European Union while GAAP is from the United States with few years of gaps in launching with GAAP beginnings is traced to 1939 and IFRS early form 1973. Aside from the latter, there are numerous points of comparison and contrast between GAAP and IFRS as accounting principles namely: (1) boundaries of scope, (2) theoretical stage, (3) financial statements interface, (4) balance sheet, (5) income statement, (6) equity, (7) cash flow, (8) inventories, (9) intangible assets, (10) fixed assets, (11) fixed asset impairment, (12) investment properties and (13) liabilities. As accounting standards, the IFRS and GAAP have been affecting the global economy and often evaluated against another. In conclusion, the thesis is validated and more differences are mirrored and these may cause increase awareness and better decision-making in the future of accounting standards convergence issues.
Introduction
This research paper is about comparing and contrasting International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) in several aspects. Both IFRS and GAAP are accounting terminologies and standards relevant as the world and its economies are pushing forward globalization. Through comparing IFRS and GAAP, there can be notions on which is a better accounting standard leading to inclination of whether or not one can be removed.
The purpose of this paper is to thoroughly evaluate IFRS and GAAP against each other. This is significant to be more aware of the differences, similarities and importance of both to economies and the world in general. Moreover, one of these two could rule and make the other insignificant in the future.
For instance, there was strong news that GAAP would be eradicated in 2011 and this part of the history may repeat again. In this repeat, the companies and ruling agencies must be duly prepared. Through this preparation, there could be better decision making in the future whether to retain both, remove one or even integrate IFRS and GAPP. Detailed information is essential for both accounting principles to be fully utilized, implemented, assessed and recommended to nations.
Nevertheless, IFRS and GAAP's existence for a relatively long period of time proves of their world to several nations and the removal of one would enable much changes and adjustments not only in accountancy and business but even more fields. There effects of IFRS and GAAP may extend to economics, research, statistics, science, mathematics, physics and technology among others.
Thesis Statement
The IFRS and GAAP accounting standards are more elaborately evaluated on the basis of differences in order to point out more effectual practices IFRS can adopt from GAAP or vice-versa or consider which is more effective among the two in case of probable weighing global choice for a universal accounting standard later on.
Review of Literature
Since the early 20th century, American accountants have been following principles of accounting. The American Institute of Accountants (AIA) publishes Examinations of Financial Statements, which introduces the term generally accepted accounting principles, known as GAAP later on (Zeff, 2005).Further historical accounts led to the development of GAAP. In the long development, the United States is used to it and stands by it even more countries are in favor of the IFRS.
Prior to Generally Accepted Accounting Principles (GAAP), there were former agencies handling it and utilizing other names for GAAP but more or less the accounting function is similar to GAAP today and the olden times when the United States initially makes use of it. This historical account is remarkable for being handed down to several agencies and government terms.
The GAAP refers to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards including conventions, and rules accountants follow in recording and summarizing, and in the preparation of financial statements. This accounting standard has been loyally utilized by the United States of America and countries it is transacting with.
Accounting standards have historically been set by the American Institute of Certified Public Accountants (AICPA) subject to Securities and Exchange Commission regulations (Smith, 2012). By 1939, the latter formed the Committee on Accounting Procedure (CAP). However, Accounting Principles Board (APB) superseded CAP in 1951. This suspension led to a change in accountancy standards.
The APB is changed into Financial Accounting Standards Board (FASB) under the supervision of the Financial Accounting Foundation with the Financial Accounting Standards Advisory Council serving to advise and provide input on the accounting standards (FASB, 2012). Circa 2008, the FASB issued the FASB Accounting Standards Codification, which reorganized the thousands of US GAAP pronouncements into roughly 90 accounting topics (AICPA, 2008). Indeed, these topics have been very helpful to the United States conduct of accounting in business and other purposes.
In 2008, the Securities and Exchange Commission issued a preliminary roadmap that may lead the U.S. to abandon Generally Accepted Accounting Principles in the future, and to join more than 100 countries around the world instead in using the London-based International Financial Reporting Standards (Crovitz, 2008).Actually, the GAAP is formed several years earlier than IFRS.
The RFS came about in order to unify and standardize accounting standards in the global arena. Initially, the IFRS aimed to regularize the European Union when it used to be IAS or International Accounting Standards issued in 1973. On 1 April 2001, the new IASB took over the responsibility for setting AIS and aimed to further develop standards calling the new standards International Financial Reporting Standards (Bradshaw, 2010).The recent development of the IFS may have contributed to its fast progress and popularization by intending it to be used worldwide.
The IFRS is formulated to serve as a business global language and making corporate accounts comprehensible across countries internationally. By 2005, numerous European Union companies which were publicly traded were into IFRS due to law requirements. The IFRS have been utilized in more than one hundred states.
Analysis
Even if the IFRS and GAAP are both accounting standards, these are same and different simultaneously and with these characteristics revolving both accounting foundations, there are continuous intrigues and issues revolving both world renown accounting topics. These are unceasing and even have the tendency to proliferate. Nations may battle due to these standards making it significant to fully understand each and evaluate against each other to clarify its differences and similarities' purposes.
The IFRS and GAAP are usually assessed side by side for remarkable dissimilarities and similarities in many areas namely (1) boundaries of scope, (2) theoretical stage, (3) financial interface, (4) balance sheet, (5) income statement, (6) equity, (7) cash flow, (8) inventories, (9) intangible assets, (10) fixed assets, (11) fixed asset impairment, (12) investment properties and (13) liabilities among others within these listed.
These dissimilarities and similarities are noteworthy for its technicalities and scopes. The variations would make accountants and even non-accountants assess better which may be better for businesses and nations for the longer term and in case there is a compulsory decision agreed upon worldwide by nations in majority.
These detailed comparisons and contrasts of two accounting principles are detailed in the following paragraphs below.
Boundaries of Scope
In terms of boundaries of scope, IFRS is wider in coverage than GAAP which is mainly concentrated in the United States. The IFRS has been adopted by various European and even non-European countries.
The IFRS has been adopted by European Union, India, Hong Kong, Australia, Malaysia, Pakistan, GCC countries, Russia, South Africa, Singapore, Turkey, and entire Europe and currently require or permit IFRS reporting and 85 require IFRS reporting for all domestic, listed companies, according to the U.S. Securities and Exchange Commission (SEC, 2008). Basically, the IFRS has more country covered and hence, more popular and favored upon for many have been choosing to implement it.
As for the GAAP, it has been implemented although out the United States and countries transacting with America and the publicly traded companies. Unlike IFRS, the GAAP is not intended to be utilized worldwide. In its planning, the concentration of use is for the United States as part of its laws and for the business coming in the country. The IFRS is decided to be implemented globally from the time of its formulation. That's the reason for international word to be incorporated to its name.
Theoretical Stage
The IFRS is commonly referred to principle based in reference to its bookkeeping criteria. On the other hand, GAAP is more inclined to rules. In this, IFRS is viewed better in terms of business transactions than GAAP. Despite of the latter, the United States' prefer to stand by its own accounting standard in GAAP.
Financial Interface
Financial interface refers to financial statements presentation inclusive of overview. For the IFRS, the forms as well as content are indicated. It also has IAS still extant as well as SIC/IFRIC Interpretations. There can be added requirements depending on national laws and stock exchanges among others. As for GAAP, this is all GAAP in both form as well as content. The latter is stated by GAAP rules of hierarchy as well as SEC regulations. Moreover, it is consistently regulated by the United States government and related agencies concerned with accounting and standardization.
Financial statement of IFRS is composed of balance sheet, a statement showing either entire changes in equity, income statement; or adjustments in equity excluding those arising from investment or rather capital dealings with proprietors and distributions to these proprietors known as a Statement of Recognized Income and Expense and there are no exemptions to cash flow statement, accounting guidelines and illustrative notes (Bradshaw, 2010). Seemingly, IFRS is not particular with formats and its users are given more flexibility in its utilization and proliferation by mere following its basics.
As for the GAAP financial statement, it contains income statement, statement of widespread income and balance sheet (Crovitz, 2008). This may be filed with the income statement and even with stockholders' equity statement of changes.
There can be detailed revelations in terms of company amendments and other pertinent documents to enable the preparation of monetary statements' notes. Cash flow statements are with restrictions as well as financial statements' notes.
Noticeably, the IFRS utilizes of financial information requirement on comparative accounts. On the other hand, GAAP has no specific requirements on comparative statement. Nevertheless, GAP has additional rules stating balance sheets for recent two years with statements of income as well as cash flows covering three years.
Through the consistent and globally applicable bookkeeping of IFRS, it is viewed to be more innovative, intelligent and capable of more breakthroughs which may be noticed and considered by GAAP. However, the United States would not prefer IFRS over their GAAP and this has been a long time issue.
Balance Sheet
The balance sheet of IFRS is within the standard format with item on the face and added data on the notes section usually. In contrast, the GAAP has no standardization in terms of balance sheet presentation. In addition, the SEC does not require GAAP to follow any specific format on the balance sheet face or notes section.
The only rule GAAP balance sheet follows is the separation of inactive from current items. The latter must have varying classifications of the balance sheet face.
Also, the IFRS balance sheet the value is placed on the assets declaration and this is regarded as accurate as well as significant. To compare with GAAP, its balance sheets are filled with disparate classifications of both present-day assets as well as liabilities. Comparatively, the IFRS is seemingly dwelling on the more positive side and capable of defining the other side through knowing the assets alone.
In IFRS assets section, the latter is divided in two lines on the balance sheet face as part of the IFRS deferred and current tax liabilities which is actually filled with assets. In GAAP, the same deferred tax assets and liabilities are further segregated into present and inactive amounts, current and non-current respectively. In addition, there are high lights on the liabilities for being prioritized on balance sheet face.
The IFRS balance sheet may be viewed as more optimistic than GAAP. Nevertheless, the importance of balance sheets dwells on its purpose and accurateness. Since both the IRFS and GAAP are continuously thriving, these balance sheets must be fulfilling its job.
Income Statement
The income statement is commonly referred to as the profit and loss account. For the IFRS, there are two categories of expenses in nature as well as function. There is no exact format for the latter. However, the items must be present on return statements' appearance as well as added information stated on the revenue statement or even in the annotations. As for the GAAP, it also does not have standard formatting in income statement. Either single or multiple step formats are both acceptable. Under SEC, the only specification is the line items to be placed on income statement's face.
The IFRS treatment of income as well as expense is as equally significant. In this, the amount disclosure inclusive of nature is on revenue statement or even in the annotations. Performance is also deemed significant by the IFRS with the manifestation of item lines, subtotals and headings among others. As per GAAP, a material occurrence or operation that is bizarre in character or transpires infrequently but not mutually must be accounted for as a detached constituent of revenue from ongoing procedures (Jeffers, 2010).
Equity
IFRS and GAAP may be compared and contrasted in terms of equity statement of changes in equity otherwise known as statement of recognized income and expense (SORIE) or the reporting comprehensive income.
As per the IFRS, present are the SORIE and recognized income statement as a primary statement, and present capital movements and distributions in the annotations, or a declaration of amendments in equity, this combines recognized income and expenses with capital movements and distributions in a statement of changes in equity (Smith, 2012).
Moreover, there are required splits for items to be under parent or minority interest in IFRS. Previous year changes are to be indicated detailed per component. As for the SORIE approach, it is directed towards detection of actuarial gains as well as losses not within profits or else the loss is taken.
While in the GAAP, the comprehensive income as well as the latter components should be captured in a monetary statement that is demonstrated with equivalent importance as the other fiscal statements that comprise a complete pack of fiscal statements (Jeffers, 2010). There is no format requirement as long as net income is stated and under the returns in the monetary statement showing income information in a detailed manner. There are three ways comprehensive income may be shown either as component of the statement of income, stand alone or at declaration of adjustments component of stockholders' equity.
GAAP reveals its adjustments in separate accounts of stockholders' equity as well as retained earnings. The latter is mandatory and disclosed at the annotations belonging to the monetary statements or in utilizing another financial statement for the matter. As for the income from minority interest, this is usually presented through the profit and loss account consolidation as after tax profits deduction.
Cash Flow
In the cash flow statement of the IFRS, there are no exemptions while in GAAP exemptions are present in form of benefit plans in pension and other employees related. In the latter, usually investment companies which are highly liquid make the cut. Cash flow standards for both IFRS and GAAP are in the categories of financing, investing and operation. As per financing, interests as well as dividends are annually classified and placed under heading which is most suited. These interests as well as dividends paid and received may be displayed either as financing or as operating cash flows.
As IFRS difference, operating cash flows are enabled through the receipt of interest received as well as paid. Moreover, cash flows related to taxation are placed under operating if cannot be indicated as financing cash flows or investing cash flows. In GAAP, all taxation cash flows are under operating activities.
Inventories
In the IFRS practice, the inventories are not allowed to utilize LIFO method in order to identify cost rather first in, first out method as well as formula on weighted average cost are permitted. Inventory process writes per item basis while GAAP allows simpler method of categorization of items initially to assist in the write downs per item.
Also, the IFRS allow reversal of market value of inventories upon meeting criteria while GAAP is stricter without any possibility of reversal in inventory.
Intangible Assets
Intangible assets refer to the technology costs or research and development costs. Under GAAP, the latter are viewed as expenses while the IFRS treat development costs as profits and benefits if placed under specific circumstances or qualifiers.
Fixed Assets
Fixed assets in IFRS and GAAP are primarily valued at cost. Upon the conduct of first acknowledgement, the IFRS can allow adjustment of fixed costs to its fair value. Final value is not applied due to the appraisal costs it can generate. In addition, the IFRS entails component depreciation upon the scenario of economic benefits varies from main asset while GAAP does not require the same.
In GAAP, the happening of component depreciation is allowed but is not compelled. Moreover, IFRS setting may define several parts of an asset to be useful and have associated value whereas GAAP may asses as a single item and enable depreciation. In this, similar item is priced and depreciated differently in IFRS and GAAP. In IFRS, this depreciation expense may even be higher and GAAP would lower this expense.
Fixed Asset Impairment
Fixed asset impairment varies in IFRS from GAAP. This impairment is customarily evaluated in the presence of indicators of impairment. Upon the fixed assets value decline in GAAP transpire, the impairment is initially assessed and by finish of reporting period the undiscounted amount is estimated for cash flows in the net future which is expected to be acquired from the asset. This projected cash flow which is net undiscounted from the asset is compared to carrying amount of the asset.
In cases that undiscounted cash flow is lesser that asset carrying amount, only then the carrying amount is analyzed side by side with fair value. In case the carrying amount is still lesser than fair value, there would be a recording of impairment loss similar in IFRS and GAAP; there is a necessary impairment loss evaluation upon detection of falling asset value.
However, the IFRS calculation is divided. In order to get the fair market value, the direct cost to sell is subtracted as well as in use asset value is identified. Value in use as applied in IFRS is the present value of estimated future cash flows to be derived from the continuing usage of the asset plus its disposal at the end of the asset's useful life and the higher of 1.) fair value less costs to sell or 2.) the value in use is called the recoverable amount which is then compared to the carrying amount of the fixed asset (Jeffers, 2010).
Upon the exceeding recoverable amount compared to carrying amount, the asset is assessed as impaired and this loss is documented in the IFRS set up via profit and loss. With GAAP, there is not reversal of impairment loss while IFRS may require the latter if settings change and enables an increase
Investment Property
In IFRS environment, investment property is acknowledged for being a property for rental or even held for cost appreciation while GAAP has no declaration of investment property. In IFRS, investment property may be documented at fair value given that value is reliable and measurable without effort and even undue cost.
Liabilities
Liabilities refer to existing obligation caused or an outcome by a past event. IFRS and GAAP welcome the probability of liability and its succeeding action possibility in payment. Nevertheless, IFRS probability of liability is different from GAAP. In IFRS probability of liability existence pertains to more than fifty percent while GAAP probability recognition is higher at eighty percent. With the latter, there are more liabilities acknowledged by IFRS than GAAP.
Conclusion
The IFRS has been implemented and adopted in approximately more than a hundred countries and it is assumed that more would be adopting it the near future. In the preparation for the latter, comparison and contrast of two accounting standards in IFRS and GAAP has been done exhaustively in this paper's qualitative research. The latter is with increasing significance given the accounting standards trend.
The US GAAP provisions differ somewhat from International Financial Reporting Standards (IFRS), though former SEC Chairman Christopher Cox set out a timetable for all U.S. companies to drop GAAP by 2016, with the largest companies switching to IFRS as early as 2009 (Crovitz, 2008). In this, populaces around the world must be aware and proactive for changes in shifting can change multitudes of business processes.
More and more companies around the world has been opening doors to IFRS inclusive of massive American companies and even the United States' government as proven by SEC. Generally, the most important and universal similarity of GAAP and IFRS is its general purpose which is to monitor and standardize accounting standards of the nation or nations implementing it.
On the other hand, the common difference lies in its formats and statistics. These are in form of paper presentation. The sections and labels may be different but the message would be the same if compared and contrasted. All accounting analysis that may be interpreted via GAAP may be done vie IFRS but results may vary since there are terms with differences in amounts or quantity or percentages.
Another significant difference is the coverage of terms meanings in quantity. For instance, a term in GAAP may mean 50% and in IFRS may be 80% and it is the same term. This may be a basis for standardization for the world to understand and agree with accounting better even if GAAP and IFRS would continue to persist in the long run as separated standards with different countries subscribing to each.
It is highly valuable to understand the historical formulation of GAAP and IFRS prior to looking at differences and similarities. There are tendencies to overlook the intentions of coming about with both causing significant variances in viewpoints. For instance, the IFRS is viewed as more friendly and easier to use that GAAP. Then, GAAP is seen as very specific and may unpopular. All these controversies may be answerable by design.
Historically, GAAP is designed to be utilized in the United States alone and countries doing business with the United States are required to be subscribed to it. Few have experienced GAAP usage. GAAP is generally for the US and those businesses to enter the United States. On the other hand, the IFRS is primarily designed for the world to use that is the reason behind the international as first word of this accounting standard. The latter is a basic logical difference which cannot be discounted in comparing and contrasting the IFRS and GAAP. And, it must not be overlooked.
Indeed, the paper validates its claims that IFRS and GAAP evaluations have more differences mirrored and these may cause increase awareness and better decision-making in the future of accounting standards convergence issues.
