Comparison between Generally Accepted Accounting Principles and International Financial Reporting Standards - Essay Example

GAAP and IFRS Comparison between GAAP and IFRS IAS17: Leases Introduction The FASB and IASB have taken considerable steps towards converging the IFRS and GAAP content. By the time the SEC allows for the incorporation of IFRS in publicly traded companies in the US, most differences might have been solved. Generally Accepted Accounting Principles (GAAP) comprise a standard framework of guidelines used in financial accounting in any jurisdiction of standard accounting practice. On the other hand, International Financial Reporting Standards (IFRS) entails a common language for accomplishing business affairs to enable a company to account for all its financial transactions across international boundaries (Yang & Nguyen, 2003).

Discussion The IAS 17 Leases prescribes accounting disclosures and policies regarding leases. Leases must be classified as either finance leases or operating leases. This applies to all leases, including those for natural gas, mineral oil, and other regenerative resources. In GAAP, leases are classified based on how they transfer the risks and rewards incidental to ownership. This is based on the perspective of the lessee which entails both the operating leases and capital. From the perspective of the leasor, this entails direct financing, sales type, and operating leases.

On the other hand, the IFRS classifies leases at the inception of the lease and takes care of the earlier date of the lease agreement as well as the commitment date by parties to the principal provisions of the lease. A finance lease in IFRS depends on whether the risks are incidental to the transferred ownership (Ampofo & Sellani, 2005). For a lease to be viable and classified as sales-type, direct capital lease, or capital lease in GAAD, certain conditions must be fulfilled. First, ownership must be transferred to the lessee by and of the term and the lease must provide for the bargain purchase option.

Second, the lessee must receive substantial economic benefits derived from the leased property when the lease term equates to a considerable portion, usually over 75 percent of the economic life of the leased property. Third, the present value must b equal to substantially fair value, usually over 90 percent, of the leased property at the inception stage of the lease (Jamal, 2010). On the other hand, for IAS 17, separate guidance for the leases is not provided when classifying the lease. Rather, examples are given for situations either individually or in combination to enable the lease to be classified as a finance lease.

Such combinations include the lease transfer ownership of the assets to the lessee by the end of the lease term. This provides the lessee with the option of purchasing the asset at a sufficiently lower price than the fair value at the date when the option becomes exercisable to be reasonably certain at the inception stage of the lease. The lease term comprises the major part of the economic life for the asset, even when the title has not been transferred. At the inception stage of the lease, the present value for minimum payments amounts to at least fair value for the leased asset.

Furthermore, in IFRS, leased assets are unique and can only be used by the lessee without any major modifications (Goodwin, 2006). For GAAD, the lessee requires conditions beyond the existing ones. Such conditions include, first, the normal conditions for the credit risk of the lease when compared to risk collection from other receivables. Second, the amounts associated with unreimbursable costs likely to be incurred by the leaser should be reasonably estimated. Contrary, the IFRS does not provide for the quantitative threshold that must be achieved.

GAAP is not strict on thresholds. As a result, more judgment may be required by entities when determining the classification (Peters, 2011). For GAAD, discount rates used by the lessee in the determination of the present value for the minimum payments are lower than the rates for incremental borrowing and implicit in the lease when practicable to determine. For IFRS, if practicable, the entity must use the interest rate implicit in the lease as the discount rate when calculating the present value for minimum lease payments.

When impracticable, the incremental borrowing rate by the lessee may be used (Tyrrell, 2007). The direct financing leases in GAAD form the finance income that is the difference between minimum payments for the leases, net of executor profit costs and any unguaranteed residual value for the leased property accrued to the leasor, and the costs of the leased property.

For IFRS, the lessors must recognize assets of the finance lease in balance sheets at the inception of the lease. This encompasses gross investment in discounted lease at an interest rate implicit within the lease. The lease payment act as the leaser's repayment of the principal and the finance income for reimbursing and rewarding the investment and services by the leaser (Needles & Marian, 2010).