Income Statements of International Financial Reporting Standards - Term Paper Example

 Income Statements of International Financial Reporting Standards Introduction U.S GAAP (Generally Accepted Accounting Principles) is practiced only in United States while IFRS (International Financial Reporting Standards) are adopted by the International Accounting Standards Board (IASB). There are notable differences between IFRS income statement and a typical income statement prepared using U.S GAAP. Differences in Income Statements Firstly, income statement captions are not required in the case of US GAAP while IFRS prescribes minimum caption in income statement. In addition, the US GAAP treatment allows either single step or multiple steps format for income statement captions. According to Epstein (2011), under US GAAP, expenses such as cost of sales and administrative expenses have to be classed by function whereas in IFRS, expenses can be classed by function or nature. According to US GAAP treatment, classification of extraordinary items is permitted under certain circumstances and it can also be segregated within operating income. In contrast, IFRS bans classification of unusual items although it permits segregation of such items. Epstein (2011) states that the US GAAP considers estimated operating results of a discontinuing operation while measuring the expected gain or loss on disposal; on the other hand, IFRS reports actual operating results of a discontinuing operation as incurred. US GAAP provides a broader definition for discontinued operations while IFRS sets a narrow definition. Under US GAAP, restructuring costs are recognized only when it becomes necessary but IFRS recognizes restructuring costs when it is announced. Finally, additional comprehensive income items may be presented in changes in stockholders’ equity statement under US GAAP; but, this practice is not permitted under IFRS treatment. Differences in Balance Sheets As in the case of income statement, the IFRS balance sheet is also dissimilar to a typical US GAAP balance sheet. In the opinion of Epstein (2011), limited guidance on offsetting of assets and liabilities is a characteristic feature of US GAAP; however, IFRS insists specific guidance on offsetting of assets and liabilities. In case of IFRS, financial position’s classified statement is essential unless liquidity ordering is more meaningful. In contrast, such a statement is not required under US GAAP. Differences also exist in the definition of current/noncurrent between IFRS and US GAAP. The US GAAP treatment does not allow offsetting of assets and liabilities with various counterparties but it allows offsetting with same counterparties if and only the intention is to settle “net” (Epstein, 2011). On the other hand, IFRS permits some offsetting of assets and liabilities with various counter parties if legal provision allows it. Exclusion of long-term debt from current liabilities is a specific feature of IFRS. The US GAAP treatment refinances the exclusion of long term debt. The IFRS treatment states the minority interests as a component of equity while US GAAP guidelines restrict the presentation of minority interests as equity. As per the structure of US GAAP balance sheet format, entries are presented as total assets balancing to total liabilities in addition with shareholders’ equity. In contrast, IFRS entries include current and non-current assets and current and non-current liabilities. While US GAAP presents items on the basis of decreasing order of liquidity, the IFRS presents the items in the increasing order. Advantages of IFRS to End Users Generally company management, shareholders, investors, and third parties such as banks and other financial institutions are the end users of financial statements. They get ranges of advantages if companies use IFRS accounting in financial statements. To the extent that financial statement information is not available form external sources, investors and other external users give emphasis on company financial statements. According to Rich, Mowen, and Jones (2010), IFRS format offers more comprehensive, accurate, and precise financial statement information and hence, the end users can analyze the information content without the assistance of experts (p.786). It is obvious that small investors cannot effectively anticipate financial statement information under US GAAP practice. However, the improving financial reporting quality of IFRS system assists them to successfully compete with better-informed professionals. Similarly, the IFRS system eliminates international differences in accounting practices and thereby promotes a standardized reporting format. Therefore, investors can avoid additional expenses associated with making financial information. This feature would also help institutions that are characterized with large and standardized format financial bases. The IFRS treatment reduces the cost of processing financial information and which in turn increases the stock market efficiency. Investors can surely take advantages of increased market efficiency. Finally, elimination of international differences in accounting standards would remove barriers related to cross border acquisitions and divestitures. This situation may indirectly aid investors on the ground of increased takeover premiums. In total, IFRS provides greater comparability, reduced information costs, and minimum information risks to end users of financial statements. Disadvantages of IFRS to End Users Although the IFRS harmonization would bear fruitful outcomes to end users, it involves some pitfalls too. Firstly, it is less detailed than US GAAP and therefore, users may not get all required financial information. It has been identified that IFRS fails in cost/benefit analysis. This condition is not beneficial for end users since the cost/benefit analysis is vital for comparing the financial performance of different companies. It is found that many companies create secret reserves by increasing an expense account with intent to cover up future losses and poor performances. This practice would ultimately impinge on the financial interests of shareholders and other third parties. However, the IFRS system does not take a strict stance toward the hidden reserves. In contrast, the US GAAP prohibits the act of keeping hidden reserves at the expense of shareholder values. Moreover, US GAAP is superior to IFRS concept on the ground of several aspects. Although, IFRS guidelines are easy to follow as compared to US GAAP, investors and shareholders need to take extra efforts in order to be familiar with financial statements prepared under IFRS format. Finally, the end users get fruitful benefits from IFRS harmonization if and only if this concept is implemented globally. However, the potentials of IFRS system can overcome its limitations and offer fruitful benefits to end users. References Epstein, B. J. (2010). IFRS statement of financial position. IFRS vs. GAAP. Retrieved from http://www.ifrsaccounting.com/ifrsbalancesheet.html Rich, J., Mowen, M., Hansen, D & Jones, J. (2009). Cornerstones of Financial Accounting. Canada: South-Western Cengage Learning. Read More