Introduction
The IFRS are accounting standards, rules and principles that were introduced by an independent organization in the United Kingdom, known as the International Accountants Standards Board. They have been adopted in many countries over the recent years. In every country there is the Generally Accepted Accounting Principles (GAAP) that the company accountants have to adhere to in the preparation of financial statements.
Leases and Pensions
There are certain differences between U.S GAAP and IFRS when it comes to pensions and leases. The guidelines for the IFRS on leases are detailed under IAS 17. When it comes to the minimum lease payments, in IFRS, the rate used to discount the minimum lease payments is the rate implicit in the lease. On the other hand, in GAAP, it is mandatory for the lessors to use the implicit rate. However, the lessees generally use the incremental borrowing rate to discount the minimum lease payments. The lessees are allowed to use the incremental borrowing rate unless the implicit rate is known and is lower than the borrowing rate.
There are also recognition differences in sale and lease back transactions that fall in the operating and finance leases category. Under the IFRS, the gain is recognised immediately. However under the GAAP, the gain is not recognised fully at once. It is amortized over the lease period. For the leases that fall under the finance lease category, under the IFRS, the gain is recognised over the lease term. Under the GAAP system, the gain is recognised or recorded over the useful life of the asset (Deloitte, 2007).
In the IFRS system, the land and buildings are considered as separate leases unless the value of the land is not a material amount. Under the GAAP system, the land and buildings are usually considered together unless the value of the land is over 25% of the fair value of the leased property.
The principles that companies should adhere to when it comes to pensions is found in the IAS 19 guidelines. There are no “special” benefits under the IFRS system. The termination benefits are recognised immediately the employer has committed himself to paying the employee. In GAAP, voluntary terminal benefits are recorded when the employee has accepted the employer’s offer. Contractual benefits are recorded when it is probable the employees will get benefits and the amount can be estimated. One time benefits or “special” benefits are recorded when the employers have communicated to the employees. Where in the special benefits category, the employee will render service beyond a minimum retention period; the amount is recognised over the future service period.
In IFRS, the company accountants are not allowed to keep recycling the actuarial gains and losses that were recognised in equity in the previous years in the profit and loss account. In GAAP, these amounts can be reclassified from other comprehensive income and recorded in the profit and loss in the category of net periodic benefit cost (PriceWaterHouseCoopers, 2008). On pension assets, under the IFRS, the assets that are recognised should not exceed the net total of unrecognised past service costs, actuarial losses and the present value of benefits of refunds. Under the GAAP system, there is no limitation on the amount of assets that can be recognised.
For multi-employer plans that are defined benefit plans, in IFRS, they should be recognised as a defined benefit plan if the required information is available. If the information is not available, it can be categorised as defined contribution plan. Under the GAAP, it is categorised as a defined contribution plan. In IFRS, the past service costs are recorded as an increase to the defined benefit obligation. The past service costs in GAAP are recorded with other comprehensive income where there are unrecognised actuarial gains and losses.
For the past service costs for the vested benefits, the IFRS require the accountants to recognise the costs immediately. In GAAP, the costs are amortised over the remaining service life or life expectancy. Where there is a curtailment of a benefit plan, under the IFRS, the accountant can recognise the curtailment losses or gains once the company has announced the curtailment. In GAAP, recognition can only occur once the relevant employees have been terminated or the suspension plan is drawn and adopted by the company which comes at a later date.
Conclusion
There are significant differences between the two accounting differences especially when it comes to revenue recognition. A company has to mention which accounting principles were used in the financial statements for the investors and other stakeholders to have a clear understanding of the accounting information.
Works Cited
Deloitte. IFRS and US GAAP: A Pocket Comparison. 2007. Web. 25th November, 2011.
<http://www.iasplus.com/dttpubs/0703ifrsusgaap.pdf>
PriceWaterHouseCoopers. IFRS AND US GAAP Similarities and Differences. 2008.
Web. 25th November, 2011.<http://download.pwc.com/ie/pubs/IFRS_USGAAPSep08.pdf>
