What are the major differences between U.S. GAAP and IFRS in the reporting of assets and liabilities?
By William Parrott, Ph.D., CPA Show
International Financial Reporting Standards (IFRS) are almost certainly coming to the United States. Many predict that within five years, these standards may replace all existing U.S. GAAP currently promulgated by the Financial Accounting Standards Board (FASB). More than 100 countries already have adopted IFRS. The Securities and Exchange Commission now permits foreign private issuers to report using IFRS, and is considering allowing domestic U.S. companies a choice between U.S. GAAP and IFRS. Private standard-setting bodies (similar to the FASB in the U.S.) no longer exist in a number of countries. The future of the FASB is cloudy at best, but it does not favor allowing domestic companies a choice of IFRS or U.S. GAAP. As can be seen from their Web sites, the large international public accounting firms also unanimously favor adopting IFRS instead of allowing two competing sets of standards. Since the “Norwalk Agreement” in 2002 (www.fasb.org/intl/convergence_iasb.shtml), the FASB itself has actively worked toward a single set of global standards through a variety of short-term convergence projects and several major long-term projects. In many respects, IFRS, as established by the International Accounting Standards Board (IASB), are very similar to U.S. GAAP. However, there are a number of significant differences, several of which are summarized below (with the specific standard disclosed in parenthesis). Both summary and detailed information on IFRS can be found at www.iasb.org. Principle-Based vs. Rule-Based Standards This is by far the most significant and far-reaching difference. U.S. GAAP is largely rule-based, with very detailed and specific guidance. Standards relating to revenue recognition and leases, for example, run into the hundreds of pages, many of which are industry-specific. IFRS, on the other hand, emphasize broad principles over detailed rules. Professional judgment becomes much more important in dealing with specific problems and situations. “Bright line” answers often are not available. For example, in the U.S., consolidated financial statements are generally required whenever one company owns more than 50 percent of the voting stock in another company. IFRS (IAS No. 27) requires consolidation whenever one company has “control” over another entity, which can occur with less than 50-percent ownership. On the plus side, IFRS are much shorter and less complex than U.S. GAAP, and thus easier to understand. Fewer than 50 international reporting standards currently exist. In contrast, there are literally hundreds of U.S. accounting pronouncements, including FASB Standards (163 to date), and numerous EITF and AICPA rules and procedures. Some experts feel that U.S. companies are at a competitive disadvantage because of the complexity of our standards and the cost and difficulty of applying them. On the other hand, principle-based standards have major auditing implications, especially since they easily could be interpreted differently by different individuals (e.g., management vs. auditors). Significant Financial Accounting Differences Affecting Most Companies Inventory Property, Plant and Equipment Asset Impairment Significant Differences Affecting Many, but Not All, Companies Research and Development Costs Extraordinary Gains/Losses and Discontinued Operations Accounting
for Deferred Income Taxes: Long-term
Construction Contracts Leases Miscellaneous Differences
Implications for Practitioners The good news is that the FASB and the IASB, which sets IFRS, have been working together on a variety of “convergence” projects. Many differences that existed a few years ago no longer exist today. More convergence of standards can be expected. Several recent FASB standards are the result of joint projects with the IASB, where the final standards of both organizations are identical in content and wording. However, globalization of IFRS, should it occur as expected within the next several years, will come at a cost. Much CPE will be required. Clients will have to be educated. Considerable resistance can be expected, especially from those of us who have studied and used only U.S. GAAP for many years. Future CPAs will learn much about IFRS while in school, so the transition should not be so difficult for them. Implications in terms of the CPA examination and the future role of the SEC (and the FASB) have yet to be determined. The bottom line: It is not important that practitioners learn detailed IFRS at this time. However, it is important, if not vital, to be aware of their impending significance. Stay tuned for future developments! William Parrott, Ph.D., CPA, is an associate professor of accounting at the University of South Florida, where he has taught for over 30 years. He teaches both intermediate and advanced financial accounting courses at USF. In addition, he coordinates and teaches in the USF CPA Review Program, and also serves as coordinator of the USF Master of Accountancy Program. What are the main differences between U.S. GAAP and IFRS?IFRS is a globally adopted method for accounting, while GAAP is exclusively used within the United States. GAAP focuses on research and is rule-based, whereas IFRS looks at the overall patterns and is based on principle. GAAP uses the Last In, First Out (LIFO) method for inventory estimates.
What are the main differences between U.S. GAAP and IFRS concerning the treatment of property assets?One of the main differences is that IFRS deals with a “decommissioning fund” that should be recorded and disclosed in the notes. GAAP does not have such a provision on decommissioning funds.
How do financial reporting frameworks differ between IFRS and GAAP?IFRS is issued by the International Accounting Standards Board (IASB).
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Difference between GAAP and IFRS.. What are the major differences between a company that reports under IFRS and a company that reports under Aspe?The presentation requirements of the Statement of Financial Position under ASPE and IFRS are very similar. The key difference is that there is a requirement to present a third Statement of Financial Position in certain circumstances under IFRS.
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