IFRS versus GAAP Comparison
Jennifer Brown, Jason Hammock, Dominec Pietrandrea, Anne Risley, Inga Wedderburn ACC/291
November 24, 2014
IFRS versus GAAP Comparison
In the United States, companies use an accounting method referred to as Generally Accepted Accounting Principles (GAAP). While the U.S. has structured GAAP to align all reporting for U.S. businesses, it is different from most other countries accounting standards. International Financial Reporting Standards (IFRS) is an accounting standard used in over 110 countries around the world (GAAP vs. IFRS, n.d.). With the Securities and Exchange Commission looking to move the U.S. accounting to the IFRS standards, understanding the differences is crucial. What follows is an overview of the differences between the two accounting standards, GAAP and IFRS. Fair Value Measurement of Assets (Dominec Pietrandrea)
Fair Value measurements provide users of financial statements with an accurate picture of the value of a company’s assets. As part of this ongoing and complex cooperative effort, there is currently a joint project between the FASB and the IASB to develop a common measurement and reporting structure for fair value accounting (Metzger, n.d.). Fair value accounting has been around for many years and has been used for many asset and liability accounts. Due to the expanding use and misuse of financial reporting, the FASB and the IASB have worked to implement a common approach. The first step is disclosure of fair value information in the notes. The second step is the fair value option, which permits, but does not require, companies to record some types of financial instruments at fair values in the financial statements (Kimmel, Weygandt, & Kieso, 2013). Currently IFRS uses a two-tier approach and GAAP does not use the same approach. IFRS and GAAP still differ in the criteria used to determine how to record a factoring transaction. Looking forward, finding common ground and aligned terminology and philosophy is an important issue to work toward a single defined process. Component Depreciation (Jason Hammock)
Under IFRS, component depreciation specifies that any plant asset that has components that have different useful life expectancies need to be depreciated separately (Kimmel, Weygandt, & Kieso, 2013, Chapter 9). Within the rules of IFRS it is mandatory that it is utilized. Component depreciation is recognized by GAAP but is not widely used. This can be used for the depreciation of building if you split the depreciation of the building into land improvements and the actual building. Revaluation of Plant Assets (Jason Hammock)
The International Accounting Standard (IAS) – 16 sets the policy for “Property, Plant and Equipment” revaluation. The IAS – 16 policy sets standards for revaluations of plant assets to its fair value at the reporting date (Iatridis & Kilirgiotis, 2012). Under IFRS the revaluation of plant assets prevents the carrying value of the asset being exponentially different from the fair value. It is important that companies using revaluation ensure they apply the changes to all plant assets in the same class (Kimmel, Weygandt, & Kieso, 2013, Chapter 9). Another aspect of revaluation is when plant assets experience rapid price changes they must be revaluated on an annual basis. Product Development Expenditures (Anne Risley)
Under GAAP all research costs are expenses in the current reporting period and impact the income statement. The difference under IFRS is that companies capitalize any development costs into a project that are incurred prior to feasible capitalization (before the company could feasibly make money off the technology) are recorded as development expenses. (Kimmel, Weygandt, & Kieso, 2013, Chapter 9) Any expense incurred after feasible capitalization of the product is recorded as development costs. The impact to a company in reporting is that the development costs aren't expensed until...
References: Iatridis, G.E., & Kilirgiotis, G. (2012, Fall). Incentives for fixed asset revaluations: the UK evidence. Journal of Applied Accounting Research, 13(1), 5-20. doi:http://dx.doi.org.ezproxy.apollolibrary.com/10.1108/09675421211231871
Kimmel, P.D., Weygandt, J.J., & Kieso, D.E. (2013). Financial accounting Tools for business decision making (7th ed.). Retrieved from The University of Phoenix eBook Collection database.
Metzger, L. (n.d.). GAAP and IFRS: Reconciling Fair Value Measurements. Retrieved from FSA Times: http://www.theiia.org/fsa/2011-features/gaap-and-ifrs-reconciling-fair-value-measurements/
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