Introduction
The International Financial Reporting Standards (IFRS) is a traditional mechanism of managing fiscal side of the business. However, the framework of Generally Acceptable Accounting Practices (GAAP) is a new breed of standards in this regard. There are marked differences present between the prevalent approaches, GAAP is blamed to provide enough room to the accountants to do their jobs creatively, and hence, the term creative accounting has been coined in order to define the phenomenon. The researchers have found significantly pronounced linkages between the presence of accounting irregularities and application of GAAP. Additionally, the accountants have been known to book the inventory beforehand in order to artificially increase the assets of the company whereas, they record expenses and liabilities with a delay in order to keep a viable figure of the working capital intact at all times. The stakeholders are usually misinformed about the true level of liquidity of the company as well.
Financial Accounting Standards Board (FASB) is a private body that works to ensure and uphold the quality of financial reporting by passing and upgrading new and existing standards respectively. At the same time, International Accounting Standards Board (IASB) operates at a global level in order to do the same job that FASB does on a local level in the US. Both of the bodies give immense importance to the practice of establishing realistic value of financial instruments across the economies of the world. FASB has the authority to influence pricing of the instrument, and therefore, it chooses to let market dynamics of price and demand set the worth so that investors can have the best value in the form of financial instruments. The IASB on the other hand does not have any formal authority to manage the prices of financial instruments, and therefore, it has to operate by collaborating with the local governments. The ideologies about fair value measurement of FASB and IASB do not differ theoretically, but their institutional power to influence it in a meaningful way differs in the favor of the formerly mentioned regularity body.
Component depreciation is an approach that reduces the value of each component of the property at various rates in order to have a realistic estimate of the devaluation. The technique is often applied on machinery, and equipment of substantial value. Not all of the components of the machine depreciate with a same degree, and therefore, the accountants have to record their depreciation separately. Additionally, each of the components sells in isolation so that profit and loss can be individually determined as well.
The revaluation of plant assets is a process of streamlining the book values of fixed assets with their market prices. The IFRS requires the companies to record purchase of new assets at cost. However, it allows them to apply two different approaches to record the depreciation of the assets. The cost model reduces the value of an asset over time by using methods such as straight line whereas; the revaluation model works to strike a balance between market and book value of the belonging.
The developmental costs and expenses differ in terms of their orientation. The former ones have the strategic nature, and therefore, they are substantial as well. However, latter ones have the operational nature. The heavy machinery installed in order to produce a new product goes under the head of developmental costs, and resultant overhead spending is treated as expenses.
The contingent liability is an obligation that will be created if a specific event occurs. The company may face a liability of paying the damages to the customers because it failed to deliver the product on time or delivered it in a compromised condition. In the example, creation of liability was dependent on the quality of the product at the time of delivery and timeliness of the delivery itself.
IFRS and GAAP have a marked differences present between them. They treat intangible assets differently. IFRS records an intangible asset if it can provide the business with real-time fiscal advantage through creation of revenue or reduction of cost. GAAP records intellectual properties at perceived market value. IFRS does not permit the accountants to apply Last in First Out (LIFO) method to record inventory, but under GAAP, they can use both LIFO and FIFO. IFRS is realistic regarding treatment of discarded inventory, and allows the companies to reclaim the sale of wasted inventory under some specific circumstances. GAAP does permit that.
Conclusion
This paper has been written in order to discuss key differences that are present between IFRS and GAAP. The IFRS is more committed to traditional accounting practices, but GAAP brings novelty in the science. The differences between various methods for recording depreciation are also highlighted. The research effort concluded that FASB and IASB working for the realization of the same goals with different perspectives.
References
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