GAAP Rule effect on International Accounting - Essay Example

GAAP Rule effect on International Accounting Summary In both the IFRS and GAAP, there are certain similarities and differences between accounting principles. In the year 2002, both IASB (International Accounting Standards Board) and FASB came to work together towards the convergence of GAAP and IFRS. A combined plan has been developed by FASB and IASB for developing revenue recognition and accounting standard concept. In the year 2008, a model had been developed that describes the revenue recognition approach.

This model concentrates on asset and liability which may come from ‘enforceable agreement with a customer’. According to this model revenue will not be recognized unless the performance requirement is satisfied. The FASB and IASB proposed an approach for recognition of revenue which will form one single standard in all industry for accounting. These newly developed standards need better disclosure in balance sheet. This will help an accountant by making their job much easier because they don’t have to follow other standards.

FASB has developed five steps that a company must follow for the new process of recognition of revenue. 1. A company must recognize the contract for revenue recognition. This will supply goods and services to its customer. Contracts can be in written format or may be oral. Company required segmenting the contract if the value of some goods or services is prepared independently. 2. The goods and services of contract should be accounted as different performance obligations because the goods or services are sold independently and they have different profit margin.

If the good or service is similar then it must be combined with other good or service until a different performance obligation is created. 3. This is the third step in recognition process. In this process company has to determine the transaction price. This price displays the possible biased consideration that an individual expect to receive from the customer in exchange for transmitting goods or services. The revenue estimation contains estimation about variable consideration that signifies a considerable change of GAAP.

A part of transaction cost differ over quantity and timing for example discounts, refunds, credits, incentives, bonuses, rebates and concessions. 4. Once company classifies the performance obligation and establishes the transaction cost, the recognition model needs to allocate the proportion of transaction cost to separate selling prices. Any discount will be assigned proportionally to every performance obligations. On satisfaction of performance obligations at the same time, the projected guidance permits them to be aggregated. 5. Finally company generates income when it satisfies the performance obligation through transmitting good or service.

The total income is the amount assigned to the performance obligation through transaction cost. IASB worked directly with FASB to formulate a common approach which was related to the issue of valuation of financial asset and liability. The boards provide guidelines of the disclosure about financial instrument, including information of fair cost are shown below: The financial asset should be disclosed at fair cost through profit or loss and must be shown separately The financial liability should be considered at amortized cost.

In case of loan, the liability must disclose the ‘maximum exposure to credit risk’ of any loan taken, or similar exposure to credit risk. Liability should disclose the amount of change in fair value of any associated credit or related instrument that has happened during the period when the loan was designated Financial instrument also need to disclose about ‘held–to–maturity investments’, ‘available– for–sale’ financial assets and receivables Bibliography Lamoreaux, Matthew G.

& Nilsen, Kim. Convergence Milestone Journal of Accountancy, 2010.