Financial Accounting and Reporting - Essay Example

U.S. GAAP consists the accounting standards whose history dates back to the 1930s. The standards were put in place by the American Institute of Accountants following the stock market crash in 1929. Between 1938 and 1939, U.S. GAAP was established under the pressure of the chief accountant of the Securities and Exchange Commission (SEC). The chief accountant required AIA to provide substantial standards to be observed when performing accounting practices. A special committee was formed thereby recommending several accounting and reporting standards as well as introducing the concept of “financial statements.”  This paper summarizes the difference between IFRS and US GAAP as well as gives you an understanding of what these two sets of standards are.

Differences:

1. Under the US GAAP Inventory is carried at the lower cost or market, where the market is the current replacement cost. LIFO permitted. Under IFRS Inventory is carried at a lower cost or realized value. Realizable value is the best estimate of the amount expected to be realized considering the business purpose. LIFO is prohibited
2. Under US GAAP Inventory write-downs are written down to lower-cost or the market creates a new cost basis. Reversal of previously written down amounts is prohibited. Under IFRS previously written down, amounts can be reversed up to the original impairment loss if the reason for impairment no longer exists.
3. When determining a method for long-lived asset impairment under US GAAP you must use the two-step approach. Must perform the recovery test and if not met you must then perform the impairment test. Under IFRS you can use a one-step approach.
4. Under financial documents, US GAAP required financial statements to incorporate a balance sheet, income and cash flow statements, changes in equity, and footnotes. Also, US GAAP required that current and non-current assets be separated while interests are incorporated in liabilities on a separate entry line. Similarly, IFRS requires similar trends to be followed but deferred taxes should be included on a separate entry line on the balance sheet (Ball, 2006).
5. Although IFRS requires the presentation of detailed analyses of significant accounting policies, including the basis of measurement used for financial reporting, today US GAAP also requires the accounting personnel to disclose relevant information to stakeholders to enhance transparency (Wiecek & Young, 2009).
6. Although the U.S.GAAP aspect of “going concerned” was not clear, today’s US GAAP has a clear framework of “going concerned”. IFRS has a prominent framework underlying the assumptions of “going concern” that is in terms of accrual (Gibson, 2012).
7. When defining assets, U.S.GAAP delineates an asset as having a future economic advantage while IFRS defines an asset in terms of wherewithal from which prospective economic advantages are drawn and flow to the company.
8. Another difference that resides today in both standards is in the operating section of the report of cash flows. For U.S.GAAP, interest paid or received is an operating item. FAS 95 took the position that cash flows from in-service activities should reflect the effect of cash dealings and other events that enter into the determination of net income (Elliott & Elliott, 2006:2008). IFRS allows interest paid to be classified as financing or operating and interest received to be investing or operating.