The rise of globalization has necessitated the need for adopting common financial and reporting standards (Bellandi, 2012). IFRS developed by IASB promises to deliver on the elusive common standard for organizations all over the world. Although GAAP and IFRS differ in important ways, but notable similarities can also be observed. Generally, GAAP is more detailed than IFRS. In some areas, IFRS provides no guidance where GAAP has strict requirements.
There are differences in the conceptual framework between the GAAP and IFRS. Conceptual framework under IFRS provides authoritative guidance that presents treatment of a transaction that is not covered with a set standard. Under GAAP, its conceptual statements are not authoritative guidance in matters of reporting.
Recognition and definition of assets and liabilities are not the same in GAAP and IFRS. Under IFRS, concept statements tie the definition of an asset or a liability to a future probable event. The event is defined in a general use context and expected to occur based on the evidence available. In contrast, IFRS does not use the concept of probability in defining an asset or a liability. It considers that recognition requirement may be achieved at some time. Another criterion used under IFRS to recognize an asset, or a liability is that an entity should measure the reliability of the value of cost before it is recognized(Bellandi, 2012).
Evaluating materiality: according to IAS 8 as provided by IFRS, an item or transaction is material if its omission can influence the decision of users. GAAP does not provide specific materiality guideline.
Correction of errors: under IFRS, material errors should be corrected in the current period for the errors that occurred in the previous period. It is not required that previous financial statements are corrected and then reissued. GAAP requires the errors for the previous period to be corrected after discovery and financial statements revised and reissued.
Impracticability exceptions: allowed to full retrospective correction for errors of the previous period in IFRS. US GAAP requires that the material errors are quantified and restated without exception.
Presentation of financial statements retrospectively is allowed under IFRS. There is no comparable rule in GAAP.
GAAP provides guidance on indirect effects, change in reporting firm or organization, and disclosure requirements related to errors. These guidelines are absent in IFRS.
Diluted EPS year-to-date period shares are calculated differently. IFRS provides that dilutive shares should be determined in an independent fashion for each specific period presented. Other areas under earning per share where differences exist include the following:
- Convertible instruments and other instruments with multiple settlement alternatives
- Effect of tax on deployment of treasury stock method
- Cash flow per share presentation
Cost allocation in interim reporting: IFRS requires recognition of expenses for the period when they were incurred. Under GAAP, some costs may be staggered if their benefits cut across periods.
Determination of Materiality and correction of errors is done for the period under consideration under IFRS. US GAAP requires interim reporting to be based on assessment of the interim period done against estimated income for the whole year (Shamrock, 2012).
There are differences in accounting for risks and uncertainties, as well. GAAP requires disclosure relating to vulnerabilities that are as a result of certain concentrations. These concentrations could be individual customers, sources of supplies, and catastrophes occurring in the area the firm are based. There is no requirement under IFRS comparable to this.
Estimates that are expected to change should be discussed under GAAP. Factors that are expected to bring changes in estimates should also be considered.
IFRS requires firms to disaggregate information for the benefit of the general public in segment reporting. This is especially useful when a firm has matrix form of the organization structure (Shamrock, 2012). Under IFRS, certain instruments are not qualified as cash equivalents. A good example is a money market funds and selected investments with a maturity period of more than three months.
Bank overdraft is accounted for as a cash equivalent under IFRS, but as short term loan under GAAP.
In accounting for other investments, GAAP and IFRS have traditionally been fundamentally different. Under GAAP, equity method accounting is allowed for an investment that passes off as a joint venture. Also, proportional consolidation is allowed by GAAP in some industries. IFRS expressly provides that joint ventures apply the equity method and joint ventures to use proportional consolidation (Shamrock, 2012).
IFRS requires an entity to use recently produced statement of finances of an associate when using the equity method. The time period for the financial statement should be the same for both the investor and the associate. Where it is not possible to synchronize the time period for the preparation of financial statements, the time difference should not exceed three months. The impracticability threshold applied by IFRS with regards to the time period is absent in GAAP.
Accounting policies for both investor and investee are required to be the same under IFRS. Where accounting policies are different, adjustment is required.
In inventory, significant difference is noted in the choice of valuation methodology, recognition and calculation of impairment reversals plus accounting for inventories arising from activities related to agriculture (Bruce, 2009).
Some notable similarities between GAAP and IFRS include the following:
- Both the IFRS and the GAAP require that disclosure provides users with information that will make them understand the reporting entity.
- Guidelines provided by IFRS on treatment of non-monetary transactions are similar to the ones set by GAAP.
- GAAP and IFRS require financial statements of foreign subsidiaries to be converted to the reporting currency. When this happens, changes in exchange should be reflected In the financial statements.
- Contingent liabilities are recognized in GAAP and IFRS at fair value on acquisition if that value is determined.
- Under IFRS and GAAP, income taxes are accounted for through the use of an asset and liability approach.
The discrepancies in treatment of different items in preparing financial statements in GAAP and IFRS are very important because they lead to different outcomes. It is not easy, for instance, to compare results prepared under the two standards. Also, US GAAP is rule-based in keeping with American love for legalism. IFRS, on the other hand, is principle based. The import of this is that treatment of most items is predictable and the same across board under GAAP, but may differ in IFRS (Bruce, 2009). IFRS, therefore, lacks the tiny details that are the hallmark of GAAP. As America works to adopt the IFRS to catch up with the EU and the rest of the world, the differences will determine the pace of adoption as some issues have to be smoothened out. The similarities, though, present commonalities that can be built on by Americans in readiness for IFRS.
It is expected that implementation will be gradual during the transition period. The FASB and IASB entered into a memorandum of understanding in 2006 to closely work to develop a new standard where weaknesses have been identified. Implementation, therefore, will be gradual as greater convergence between US GAAP and IFRS is achieved.
The standards developed by FASB are statutory and, therefore, companies are obliged to comply with them. The standards developed for IFRS are domesticated in the countries that have embraced international reporting standards and companies are, therefore, required to follow them.
The body that regulates US GAAP standards is FASB and IASB for IFRS.
Bellandi, F. (2012). The Handbook to IFRS Transition and to IFRS U.S. GAAP Dual Reporting. Hoboken: John Wiley & Sons.
Bruce, P. (2009). Convergence Guidebook for Corporate Financial Reporting Epub Edition.. New york: Wiley.
Shamrock, S. E. (2012). IFRS and US GAAP: a comprehensive comparison. Hoboken, N.J.: John Wiley.