Differences Between Gaap and Ifrs

Topics: International Financial Reporting Standards, Financial statements, International Accounting Standards Board Pages: 5 (1795 words) Published: August 25, 2011
Differences Between GAAP and IFRS
The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are working together to eliminate a variety of difference between the United States generally accepted accounting procedures (U.S. GAAP or GAAP) and International Financial Reporting Standards (IFRS). This convergence project grew out of an agreement reached by the two boards in 2002 (Deloitte, 2004). On February 24, the SEC unanimously agreed to publish a statement of continued support for a single set of high-quality global accounting standards. The SEC acknowledged that IFRS is best positioned to be the global standard. Even without a set conversion timeline from the SEC, IFRS has been affecting U.S. companies for some time through business dealings with non-U.S. customers and vendors, along with the use of IFRS for statutory purposes by some non-U.S. subsidiaries (Baker, 2008). Now, U.S. companies will experience an unprecedented change in accounting standards as key aspects of U.S. GAAP and IFRS converge. One fundamental difference between the two systems will affect all companies. While GAAP includes detailed rules backed up by application guidance or rules based, IFRS is principles based and open to interpretation (Jamal & Hun-Ton, 2010). As a result, companies don’t just have to change accounting policies; they have to think about accounting and the controls in place around financial reporting in a very different way (Gornik-Tomaszewski & Showerman, 2010). This is new to people who have worked in the accounting field for years and it fundamentally changes the way they do their jobs. U.S. accountants have always been told that there is a rule somewhere, and they just need to find it. Now there are principles instead, which mean they have to make a judgment. All of these factors can make a transition to IFRS a tortuous project. To get a true scope of the accounting changes that the FASB / IASB convergence agenda and the possible use of IFRS in the U.S. will bring one needs to compare the GAAP and IFRS accounting methods. Five priority areas that FASB and IASB are working on are: revenues, expenses, assets, liabilities and consolidation (Shinn, 2010). GAAP revenue recognition guidance is extensive and includes a significant number of standards issued by FASB (Gornik-Tomaszewski & Showerman, 2010). The guidance tends to be highly detailed and is often industry specific. While FASB’s codification project has put authoritative GAAP in one place, it had not impacted the volume or nature or the guidance (Jamal & Hun-Tong, 2010). IFRS has two primary revenue standards and four revenue-focused interpretations. The broad principles laid out in IFRS are generally applied without further guidance or exceptions for specific industries. Industry-specific GAAP guidance can produce conflicting results for economically similar transactions. For example, activation services provided by telecommunications providers are often economically similar to connection services provided by cable television companies. However, the GAAP guidance governing the accounting for these transactions differs. As a result, the timing of revenue recognition for these economically similar transactions also varies. On the other hand, IFRS’s broad principles-based approach is to be applied across all entities and industries (Jamal & Hun-Tung, 2010). The accounting for customer loyalty programs may drive fundamentally difference results. The IFRS requirement to treat customer loyalty programs as multiple-element arrangements, in which consideration is allocated to the goods or service and the award credits based on fair value through the eyes of the customer, would be acceptable for GAAP purposes. Some GAAP reporting companies, however, use the incremental cost model, which is different from the multiple-element approach required under IFRS. In this instance, IFRS generally results in the deferral of more revenue. Due...

References: Baker, N. (2008). Getting up to speed with IFRS. Internal Auditor. 65(5), 32-37. Retrieved from http://search.ebscohost.com/login,aspx?direct=true&db=buh&AN=52570718&site=ehost-live&scope=site.
Deloitte. (2004). IAS Plus: Key differences between IFRS and US GAAP. New York City, NY.
Gornik-Tomaszewski, S., & Showerman, S. (2010). IFRS in the United States: Challenges and Opportunities. Review of Business, 30(2), 59-71.
Jamal, K. & Hun-Tong, T. (2010). Joint effects of principles-based versus rules-based standards and auditor type in constraining financial managers’ aggressive reporting. Accounting Review, 85(4), 1325-1346. doi:10.2308/accr.2010.85.4.1325.
Shinn, S. (2009). Ready or not, here comes IFRS. BizEd, 8(4), 44-50. Retrieved from http://search.ebscohost.com/login,aspx?direct=true&db=aph&AN=43381157&site=ehost-live&scope=site.
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