Financial Ratios Impact
International Financial Reporting Standards (IFRS) and Generally Acceptable Accounting Principles (US GAAP) are standard-setting bodies that were established with the purpose of developing high quality, understandable, transparent and comparable financial information that could be useful to the financial statement users. The conceptual basis and many general accounting principles are very similar under IFRS and US GAAP. However, the application of either US GAAP or IFRS may be nevertheless significantly different. Consequently, the differences between US GAAP and IFRS may impact the figures presented in the financial statements of entities and lead to significant variances in financial ratios computed under US GAAP and IFRS.
IFRS and US GAAP differ in the classification of short-term obligations that are expected to be refinanced. Under SFAS No.6, a short-term obligation may be excluded from current liabilities and classified as noncurrent obligation if the entity intends to refinance it on a long-term basis and the intent is sustained by the ability to do so as evidence either by: (1) actual refinancing prior to the issuance of the financial statements or (2) an existence of a noncancelable financing agreement from a lender having the financial resources to complete the refinancing (FASB). Contrary, under provision of IAS 1, the long-term obligation must be classified as current when due to be settled within twelve months of the end of the reporting period, despite that its original term was for a period of more than twelve months; and that the agreement to refinance, on a long-term basis is completed subsequent to the reporting period and before the financial statements are authorized for issuance (Epstein). Classifying liabilities as either current or noncurrent is very significant for financial reporting presentation and financial ratio analysis. The difference in classification