IFRS vs. U.S. GAAP: Differences and Consequences of U.S. Adoption A Study of the Issue of Comparability
East Texas Baptist University
This paper was prepared for managers and business owners who are concerned about the possible U.S. adoption of IFRS, and its effects on financial reporting and other effected areas.
IFRS vs. U.S. GAAP: Differences and Consequences of Adoption A Study of the Issue of Comparability
In the United States all publicly traded companies are required to use GAAP (Generally Accepted Accounting Principles) as the laws that regulate their accounting. The reasoning behind U.S. GAAP is so investors can accurately compare one company to another. In America there has been a long history of people who have abused GAAP, and manipulating their numbers so that the company looks more attractive to potential investors. This manipulation then causes a need for GAAP to be added upon more and more, making GAAP law based than based on principals. Currently U.S. GAAP is well over seven thousand pages, with a good amount (about 2,000 pages) being dedicated to industry accounting. The International Financial Reporting Standards, or IFRS, is the international version of U.S. GAAP. It is used by over one hundred twenty countries, and is headed by the International Accounting Standard Board. The IASB is seeking to use IFRS to do to the world what GAAP did to the United States, provide common accounting standards so investors can accurately tell the financial position of any publicly traded company. IFRS is principals based rather than law based, consequently IFRS is only about two thousand pages long, then same length that U.S. GAAP uses to detail industry accounting specifications. The problem that has risen is that as countries become more active globally there is an increasing need to have comparability between companies of two different nations. Meaning that an investor cannot accurately compare two companies if one is in the U.S., where the company uses GAAP, and the other company is in another nation that uses IFRS. To solve this problem the Securities and Exchange Commission has already started to introduce IFRS principals into U.S. GAAP, and eventually the U.S. will have to make some transition to allow more compatibly. What are the Main Differences?
Revenue recognition under U.S. GAAP has become increasingly industry specific due to some industries take on the matching principal. The matching principal states that revenue and expenses must be recorded in the period that they are earned. An example of how this principal can be misapplied is Apple’s software updates. Apple is a highly successful technology company that has designed their own software to be run on their products. This software has periodic updates that Apple provides for free after the purchase of their products. The issue that Apple had is that upon the sale of one of their units Apple deferred some of that income because it was unearned, and would then recognize some of the income each time there was a software update because then it would become earned. The Financial Accounting Standards Board (FASB) then had to make an industry specific rule that relates to software updates; now a company can only defer income for so long before it is required to be recognized. IFRS takes a different approach to revenue recognition. It has very little industry specific guidance, because its principals based approach is to be taken across all entities and industries. IFRS states that once there is a probable chance that there will be an economic benefit for goods or services provided and that benefit is measurable, then the company recognizes it as income. Therefore, the main difference between IFRS and U.S. GAAP revenue recognition is timing. Under IFRS it is more likely that revenue will be recognized earlier than it would be under GAAP. Another major difference between GAAP and IFRS that directly affects the...
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