Accounting GAAP and IFRS Essay

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Accounting includes recording, summarizing, and reporting of the economic activities and events of an organization. It is pertinent in business decision-making and the management and control of operations. The financial statements reported by a company include the income statement, balance sheet, statement of retained earnings and statement of cash flows. Globally, there are two sets of accounting standards, the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). In particular, the GAAP are more often than not employed in the United States whereas IFRS are more often than not employed in Europe and international expanses. IFRS are regarded as being more principles-based and U.S. GAAP as being more rules-based. The establishments responsible for setting the IFRS and GAAP are the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) respectively (Gaspar et al., 2016). The purpose of this paper is to discuss the difference between GAAP and IFRS.

Differences between IFRS and GAAP



Principle-Based vs. Rules Based



One of the fundamental differences between IFRS and GAAP lies in the conceptual approach of the two accounting methods. On one hand, IFRS is principle based whereas GAAP is rule based. The intrinsic feature of a principles-based framework takes into account the potential of dissimilar interpretations for the same transactions. This circumstance entails second-guessing and therefore generate comprehensive disclosures in the financial statements. In particular, in a principle-based system of accounting, the areas of discussion or interpretation can be simplified and elucidated by the standards-setting board, and offer lesser exceptions compared to a rules-based system. Nonetheless, IFRS can consist of positions and guiding principles that can be simply and easily be deemed as sets of rules rather than sets of principles. During the adoption of IFRS, it was perceived that international standards were significantly rule-based in comparison to GAAP that were more principle-based. In addition, there is a dissimilarity with regard to the methodology employed on examining accounting treatment. With regard to the GAAP, the research lays more emphasis on the literature while on the other hand with regard to IFRS, the examination of the facts is more comprehensive (Forgeas, 2008).



In addition, the terminology that is employed in both accounting methods are largely dissimilar. For instance, under IFRS accounting approach, the terminology employed include ordinary share capital, nominal or face value and shareholders. On the other hand, under GAAP, the terminology employed include common stock, par value and stockholders. Moreover, there lies dissimilarity in the manner in which the two methods of accounting treat treasury stock. In particular, with respect to IFRS accounting approach, if an entity makes the decision to buy back shares of its own stock, then the entity is not permitted to record in its financial statements a gain or loss on the shares they purchase back (Epstein and Jermakowicz, 2008).

Inventory Costs



ASC 330, Inventory, and IAS 2, Inventories, are based on the principle that the most important foundation of accounting for inventory is cost. Nevertheless, there are major differences with regard to inventory costs between the two accounting methods. One of the key aspects of dissimilarity encompasses the costing methods. Under the GAAP method, either the last-in, first-out (LIFO) or the first-in, first out (FIFO) inventory estimates can be employed. On the other hand, under the IFRS approach, the LIFO method for accounting for inventory costs is not permitted. The same cost formula has to be applicable to all inventories that are similar in nature or use to the entity. A second aspect of dissimilarity takes into account measurement. With respect to U.S. GAAP, inventory is carried at the lower of cost or market. In this regard, market is delineated as prevailing cost of replacement, but not greater than the net realizable value and not less than the net realizable value decreased by a normal sales margin.

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On the other hand, with respect to IFRS, inventory is carried at the lower of cost or net realizable value. In this regard, the net realizable value is delineated as the approximated selling price minus the projected costs essential to making the sale (Ernst and Young, 2015).

Intangibles



Both IFRS and GAAP are delineated as non-monetary assets devoid of physical substance. The accounting treatment of acquired intangible assets facilitates in elucidating why the IFRS accounting method is deemed to be more principle-based. On one hand, the acquired intangible assets as per the GAAP happen to be measured at fair value whereas with respect to IFRS accounting method, it is solely measured in case the asset will have a futuristic economic advantage and has a calculated reliability. It is imperative to note that these assets encompass things such as research and development, goodwill, and costs of advertising (Bellandi, 2012). Another area of difference encompasses development costs. With respect to U.S. GAAP, development costs are expensed the way in which they incur with the exception of them being addressed by guiding principles in another ASC topic. On the other hand, with respect to IFRS, development costs are capitalized at the time when both economic and technical viability can be shown in line with specific criteria. A second area where the two accounting methods differ is with respect to advertising costs. Under IFRS, these costs for advertising and promotion are expensed as incurred. On the other hand, with regard to GAAP, then the costs are either expensed as incurred or expensed at the time when the advertising occurs for the very first time. IFRS and GAAP also differ in terms of revaluation. In particular, under GAAP, revaluation is not allowed. On the other hand, under IFRS, revaluation of intangible assets to their fair values is allowed with the exception of goodwill (Forgeas, 2008).

Business Combinations



U.S GAAP and IFRS also differ with regard to consolidation in the sense that the latter places favoritism on a control model while on the other hand, GAAP has a preference for a risk and rewards model. Business combinations is another area in which these two methods of accounting differ. An aspect of consideration is the measurement of non-controlling interest. For U.S. GAAP, this is calculated at fair value and encompasses goodwill. On the other hand, as for IFRS, the constituents of non-controlling interest that are existing ownership interests as well as additionally designate a proportional share of the acquiree's net asset to their holders during the time of liquidation may be measured at fair value including goodwill and also the non-controlling interest's proportional share of the fair value of the acquiree's identifiable assets but does not include goodwill (Ernst and Young, 2015).

Weakening of long-lived assets, goodwill as well as intangible assets



In both methods of accounting, long-lived assets are not usually tested every accounting year but instead at the time when there are similarly delineated indicators of impairment. One of the fundamental dissimilarities lie with respect to the method of ascertaining impairment, with respect to long-lived assets. Under IFRS, one-step method necessitated that the computation of impairment loss be undertaken in the event that impairment indicators are in existence. In contrast, with respect to GAAP, two-step method necessitates the undertaking of a recoverability test first….....

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References

Bellandi, F. (2012). The Handbook to IFRS Transition and to IFRS US GAAP Dual Reporting (Vol. 9). John Wiley & Sons.

Epstein, B. J., & Jermakowicz, E. K. (2008). Wiley IFRS 2008: Interpretation and Application of International Accounting and Financial Reporting Standards 2008. John Wiley & Sons.

Ernst and Young. (2015). US GAAP versus IFRS: The basics. Retrieved from: ifrsbasics_bb3119_22december2015.pdf

Forgeas, R. (2008). Is IFRS That Different from U.S. GAAP? The American Institute of Certified Public Accountants. Retrieved from: http://www.ifrs.com/overview/general/differences.html

Gaspar, J., Kolari, J., Hise, R., Bierman, L., & Smith, L. M. (2016). Introduction to global business: Understanding the international environment & global business functions. Nelson Education.

IAS Plus. (2016). Revenue Recognition. Retrieved from: https://www.iasplus.com/en-us/standards/fasb/revenue/asc605

KPMG. (2016). FASB Balloons Balance Sheet with New Lease Accounting Standard. Defining Issues. Retrieved from: http://www.kpmg-institutes.com/content/dam/kpmg/financialreportingnetwork/pdf/2016/defining-issues-16-6-leases-asu-842.pdf

PWC. (2017). The leasing standard -- A comprehensive look at the new model and its impact. Retrieved from: http://www.pwc.com/us/en/cfodirect/publications/in-depth/fasb-lease-accounting-model-asc-842.html

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