Comparing IFRS to GAAP Essay
September 22, 2014
Comparing IFRS to GAAP Paper
The International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP) are designed to help standardize accounting practices for the internal and external users to understand. Though GAAP actually has the term “principles” within the title, the IFRS is perceived to be based more on principles while GAAP is regarded as being based on set rules. By being more "principles based", IFRS, arguably, represents and captures the economics of a transaction better than U.S. GAAP (Nguyen, 2014). There are many fundamental differences between the IFRS and GAAP that affect the way that internal and external users of the financial statements must understand. Familiarizing oneself with these differences will strengthen the user’s interpretation of the financial statement(s), making for better business decisions.
Fair value measurements give the users of financial statements a precise view of the value of a given company’s assets. The FASB and IASB have both taken some necessary steps to attain the fair value measurement, but they have some varying aspects in their approach as well. Both the IFRS and GAAP require that firms provide information about fair value measurement practices in the notes to the financial statements. Under the IFRS and GAAP systems, companies need to report assets at either fair value or book value depending on the circumstances. All assets in the same class are generally to receive the same appraisal. The differences between the two systems would be that the IFRS values receivables using a two-tiered method that analyzes individual receivables first, and then evaluates receivables as a whole to determine if there are any deficiencies.
When an asset has different parts to it that should each be depreciated with different treatments, component depreciation occurs. If parts of the asset provide different patterns of benefit, companies are required to use component depreciation. This method of depreciation was designed with the goal of providing a clearer picture of the given asset’s book value. Using a very large manufacturing machine as an example, there could be many components to the machine that have difference salvage values and useful lives. Because one component can have a useful life of 10 years and the other only 5, the two have difference patterns of benefit and the IFRS will require that they be depreciated individually.
Revaluation of plant assets is the process of changing the value of plant assets from book value to fair value. Revaluation of plant assets must be applied when there has been a substantial economic change in the market. For example, if a building that was purchased by a company has increased due to a boom in the real estate industry, the building would need to be revalued to the fair value. In addition, the IFRS requires that all assets within the class of the revalued asset must be treated with the same valuation method to ensure that consistency is maintained. Product development is defined as “the creation of products with new or different characteristics that offer new or additional benefits to the customer” (Product Development, 2014). Companies utilizing GAAP standards are required to categorize all of their research and development costs on the income statement report. On the other hand, the IFRS only requires that research costs are reported on the income statement. It is said that once technological variability has been reached, development costs are optionally reported as capital expenditures. These methods allow the costs to be depreciated over the useful life that the technology provides.
Contingent liability can be defined as an obligation that a company recognizes as have a probability of occurring in the future. For example, a company can be fined for accidents imposed on the environment due to their...
References: Product Development. (2014). Retrieved September 22, 2014, from http://www.businessdictionary.com/definition/product-development.html
Nguyen, Joseph. (2014, August 18). What are some of the key differences between IFRS and U.S. GAAP? Retrieved from http://www.investopedia.com/ask/answers/09/ifrs-gaap.asp
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