IFRS AND GAP CONVERGENCE - Essay Example

GAAP stands for General accepted accounting principles and are the set of standards developed by US, keeping their needs in mind. On the other hand, IFRS stands for international financial reporting standards are standards developed by UK. In the past financial statements were relevant to these respective countries only but globalization has called for the need of one set of standards. Convergence of international accounting refers to the goal and the path taken to reach one set of standards that are followed throughout the world.

The goal is to eliminate the differences and to improve the standards. Various accounting textbooks now feature a mixture of both standards, by presenting financial statements in both formats. The aim is to inform students about the difference in language and presentation so that they apply the relevant standards in future. Currently both organizations aim to converge GAAP of US and IFRS of UK and later they plan to develop one set of standards for the world. . This is because these companies often have to prepare two sets of financial statements to satisfy different stakeholders.

The convergence process has helped improved standards to a large extent but there are various differences that have not yet been eliminated. DIFFERENCES Revenue recognition Under the US GAAP the revenue is recognized according to fixed prices or prices that are determinable therefore the results are not recorded as revenue until the contingency is resolved. Under IFRS however depends on the ability of the entity to measure the revenue that is being considered and the economic benefits associated with the revenue.

This often results in a difference in “revenue recognition” as the revenue is recognized earlier under IFRS and later under GAAP. Sale of goods- continuous transfer Another major difference is that GAAP does not allow cost to cost revenue recognition and the revenue under GAAP the revenue transaction is usually deferred if the revenue cannot be measured on a reliable basis. IFRS on the other hand only defers revenue in instances only when an act is more significant than others. The level of significance depends on the situation in hand.

Barter transactions Under GAAP the fair value of goods and services is used when the value surrendered is not clearly evident under the barter transaction. Under IFRS the fair value of goods and services is used only when the value is not determinable. SIMILARITIES Barter transactions In both IFRS and GAAP companies are required to use the fair value of goods and services as the starting point when measuring a barter transaction Accounting policy: The prior and comparative years are restated in both sets of