Convergence between GAAP and IFRS - Assignment Example

?Sur Lecturer Memo Convergence between GAAP and IFRS Accounting is a pivotal part in any organization. It shows the financial position of an organization and ability of a firm to settle its debts as they become due. However, various international bodies have documented accounting standards that need to be followed in preparing books of accounts ranging from balance sheet, to trading profit and loss accounts, to trial balance in order to cash flows among many others. The US Generally Accepted Accounting Principles is the major accounting standard used in the United States (Walton 45-46). The International Financial Reporting Standard on the other hand is the accounting standard practiced in over 110 countries in the world. U.s. GAAP is mostly considered as a more rule based accounting system, while IFRS is mostly based on principles. It is therefore obvious that the IFRS and the U.S. GAAP do not agree on every issue (IASCF and IASB 80-101). This paper seeks to focus on the convergence between the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standard. The International Financial Reporting Standard (IFRS) is an independent body in the private sector. It develops and approves International Accounting and Financial Reporting Standards. The International Financial Reporting Standard (IFRS) functions under the International Financial Reporting Foundation oversight. It was formed in 2001 in replacement of the International Accounting Standards Committee. International Financial Reporting Standard, under the constitution of International Financial Reporting Foundation, has a full responsibility for all technical issues of the financial reporting standards such as: preparation and issuing the interpretations of exposure drafts and International Financial Reporting Standards, full discretion in pursuing and developing technical agenda dependent on requirements of consultation with the public and trustees, the issuing and approval of interpretations by the International Financial Reporting Standards Interpretations Committee (IASB 19-21)). The income statement in the U.S GAAP and the IFRS are different In terms of classification of expense. In the U.S GAAP, there is no general requirement in the classification of items by nature or function. SEC registrants are however required generally in presenting expenses that are based on function such as administrative costs and cost of sales. The criteria of extraordinary items are also restricted to both the infrequent and unusual items. In terms of the criteria of the discontinued operations, these operations are for those components that are specifically disposed of or held for sale, given that there will be no involvement with the disposed component or significant cash flows (Shamrock 29-30). On the other hand, in classifying expenses in the IFRS, expenses may be presented based on either nature or function such as depreciation and salaries. Particular disclosures on the expenses’ nature must be included in the notes if function is selected. There is no criterion of extraordinary items in the IFRS as it is prohibited. In addition, the classification of discontinued operations in IFRS is for components that are disposed of or held for sale. These components are either of a separate geographical area or a different business line (IASCF and IASB 105-110). The layout of the balance sheet in the U.S. GAAP is not generally provided in accordance to a specific layout, but the public companies follow the specified requirements in the S-X regulation. The presentation of debt that has been violated is presented as non-current in case lender agreement to waive right for repayment demand exists for more than a year prior to the issue of financial statements. In the U.S GAAP, the non-current and current classification of deferred tax liability and asset is based generally on the nature of related liability or asset. This is a requirement. The U.S GAAP has no requirement for a third balance sheet. On the other hand, the IFRS has no prescribed layout standard for a balance sheet; however, it includes a line of minimum items which are generally less prescriptive compared to the Regulation S-X requirement. In IFRS, the debts that are violated must be indicated as current save for when the agreement by the lender was reached before the date of the balance sheet. All amounts of deferred tax assets and liabilities are classified as non-current. In addition, the IFRS requires a third balance sheet (IASCF and IASB 114-121). The cash flow statements of both the U.S. GAAP and the IFRS are more or less the same with negligible variations. The U.S. GAAP cash flow statements include performance elements such as revenue, gains, losses, expenses, and comprehensive income, assets and liabilities. On the other hand, the IFRS has elements such as revenue and expenses, and liabilities and assets. In addition, the U.S. GAAP has no much consideration of the going concern principle in its framework, while the IFRS has prominence awarded to the assumptions such as going concern and accrual (IASCF and IASB 126-128). The International Financial Reporting Standard (IFRS) has its own set accounting standards for preparing financial statements. It issues overall requirements for preparing and presenting financial statements. These standards include how these financial statements should be structured, the content minimum requirements and the overriding accounting concepts including: accrual basis of accounting, going concern, and the noncurrent and current distinction. The International Financial Reporting Standard (IFRS) requires that a complete financial statements set, should contain a statement of financial position, statement of changes in equity, statement of profit and loss and other comprehensive income, and statement of cash flows (IASB 24-25). On the other hand, the Generally Accepted Accounting Principles (GAAP) is a not for profit, private organization. Its main purpose is to develop and issue generally accepted accounting standards (GAAP) within the United States in the interest of the public (Bellandi, 50). The Generally Accepted Accounting Principles (GAAP) has been designated by the Securities and Exchange Commission (SEC) as the organization responsible for developing and setting standards of accounting for public companies in the United States. The Generally Accepted Accounting Principles (GAAP was created in 1973 in replacement of Committee on Accounting Procedure (CAP) and the American Institute of Certified Public Accountants’ (AICPA) Accounting Principles Board (APB) (IASCF and IASB 25-26). The primary mission of the Generally Accepted Accounting Principles (GAAP) is to develop and improve financial reporting and accounting standards for the education and guidance of the public including users of financial information and auditors. In order to achieve this, the Generally Accepted Accounting Principles (GAAP) looks forward to: improving usefulness of accounting and financial reporting through emphasizing on the major characteristics of reliability and relevance, and on the traits of consistency and comparability; promptly considering any significant areas, in financial reporting, in deficiency that may be improved by setting standards; keeping accounting standards current in order to reflect changes in methods of carrying out business and in the global economy; improving common understanding of the purpose and nature of information in financial reports; and promoting concurrently the international convergence of accounting standards with the improvement of financial reporting quality (IASCF And IASB 30-33). The Generally Accepted Accounting Principles (GAAP) has also developed its own accounting standards followed by majorly companies in the United States in order to achieve the above mentioned financial objectives. The standards of accounting developed by the Generally Accepted Accounting Principles (GAAP) also demands that a complete financial statements set, should contain a statement of financial position, statement of changes in equity, statement of profit and loss and other comprehensive income, and statement of cash flows (McEwen 45-47). The Generally Accepted Accounting Principles (GAAP) has developed accounting standards that foster financial reporting by entities of non-government providing information that is useful for decision making for the users of financial reports and investors (Shamrock 34-35). The accounting standards developed by the Generally Accepted Accounting Principles (GAAP) consider the views of all stakeholders objectively, and is dependent on oversight by the Financial Accounting Foundation’s Board of Trustees. The accounting standards also encourage wide participation in determining the financial position of a company by all investors and other users of financial reports (Nikolai, Bazley and Jones 19-21). In general, both the International Financial Reporting Standard (IFRS) and the Generally Accepted Accounting Principles (GAAP) have developed accounting standards used by companies all over the world. Most of the accounting standards and principles set by the two bodies are similar even though their primary mission and objectives may be different (Wiecek and Nicola 27-30). For example, both the International Financial Reporting Standard (IFRS) and the Generally Accepted Accounting Principles (GAAP) observe the following accounting principles: Entity principle, money measurement, cost, going concern principle, dual aspect principle, conservation principle, accounting period, realization concept, consistency principle, matching concept, and materiality principle (IASCF and IASB 28-30). These are important accounting standards and principles that are universally recognized and followed by companies all over the world. However, companies choose to follow only standards and principles of accounting from one body. This is so for reasons of consistency. In summary, both the International Financial Reporting Standard (IFRS) and the Generally Accepted Accounting Principles (GAAP have developed common grounds in accounting principles and standards. The two bodies share common accounting standards with very minimal differences. I would therefore recommend that our organization use the accounting standards and principles set by the Generally Accepted Accounting Principles (GAAP) because it was designated by the Securities and Exchange Commission (SEC) as the organization responsible for developing and setting standards of accounting for public companies in the United States (Kieso, Weygandt And Warfield 20-23). The Generally Accepted Accounting Principles (GAAP is also the body that develops and issues generally accepted accounting standards (GAAP) within the United States in the interest of the public. This is a solid reason to apply its accounting standards and principle due to its worldwide recognition (Cook 30-31). Works Cited Bellandi, Francesco. The Handbook to IFRS Transition and to IFRS U.S. GAAP Dual Reporting. Hoboken: John Wiley & Sons, 2012. Internet resource. Cook, David. IFRS/US GAAP Comparison: A Comparison between International Financial Reporting Standards and US GAAP. London: Ernst & Young, 2005. Print. IASB. (2009). International financial reporting standards (IFRSs) 2009: official pronouncements as issued at 1 January 2009. New York: Kluwer. 2009. Print. IASCF and IASB. A Guide through International Financial Reporting Standards (IFRSs) 2007, New York: Kluwer. 2007. Print. Kieso, Donald, Weygandt, Jerry and Warfield Terry. Intermediate Accounting: IFRS Edition, London: John Wiley & Sons. 2010. Print. McEwen, Ruth A. Transparency in Financial Reporting: A Concise Comparison of Ifrs and Us Gaap. Petersfield, Hampshire, Great Britain: Harriman House, 2009. Internet resource. Nikolai, Loren, Bazley, John and Jones, Jefferson. Intermediate Accounting. London: Cengage Learning. 2009. Print. Shamrock, Steven E. IFRS AND US GAAP: A Comprehensive Comparison. Hoboken, N.J: John Wiley, 2012. Print. Walton, Peter. An Executive's Guide for Moving from U.S. GAAP TO IFRS. New York, N.Y.] (222 East 46th Street, New York, NY 10017: Business Expert Press, 2009. Internet resource. Wiecek, Irene M, and Nicola M. Young. IFRS Primer: International GAAP Basics. Hoboken, NJ: John Wiley & Sons, 2010. Print. Read More