Introduction
The primary purpose of using specific financial reporting frameworks is to ensure validity, uniformity, consistency and reliability of the financial reports. The IFRS and the US GAAP are two financial reporting frameworks that have some differences. The IFRS are often reliant on principles while the GAAP framework is founded on rules. The application of IFRS exceeds 110 states world over while the GAAP framework is mainly in the US and other few countries such as Japan. The US Securities Exchange Commission is, however, working on a way to adopt the IFRS like other nations. The two financial reporting frameworks exhibit differences in areas such as the objectives of the financial statements. The goals provided by GAAP to business entities are different from those offered to nonbusiness entities while IFRS provide a uniform set of objectives for both business and non-business entities. This paper seeks to examine specific areas of contrast between the two financial reporting frameworks.
IFRS 2-1:
The IFRS statement of financial position under the guidance of IAS 1 outlines the specific items that should appear on the face of the statement and further outlines all the relevant information that should be presented on the face or in the additional notes. This presentation requirement displays a sharp contrast to the US GAAP which remains silent on the standard presentation format. Rule 5-02 of the Sarbanes Act, however, requires that where applicable, some selected line items must be presented on the balance sheet face. The IFRS require that all entities compliant to the framework must show their assets and liabilities in distinct classes: current and non-current assets and current and non-current liabilities. GAAP, on the other hand, is liberal on the classifications. Despite several entities using the GAAP separating the current assets and liabilities, the unclassified balance sheet is a common feature for entities using GAAP especially when such classifications are deemed unnecessary. Assets, liabilities, revenues and expenses are presented as they are at the end of the period under the IFRS, no offsetting (IAS 1.32). In GAAP However, offsetting is allowed whenever there exists the right of set-off according to ASC 210-20-45-1. ("Conceptual Framework for Financial Reporting 2010", 2016)
IFRS 2-2:
The objectives of both financial reporting frameworks converge to the general provision of relevant financial information about the reporting entities to a wide range of entity stakeholders. However, the kind of objectives provided by GAAP to business entities differs from those provided to nonbusiness entities while IFRS provides the same objectives for business and nonbusiness organizations.
IFRS 2-3:
The synonymous terms used under IFRS for common stock and balance sheet are ordinary share capital and statement of financial position respectively.
IFRS 3-1:
The SEC is tasked with the role of evaluating all possibilities of adopting the IFRS in the US. As such, the Commission should consider several financial reporting issues before arriving at the consensus to replace GAAP with IFRS. Before the endorsement of the IFRS for use in the US, SEC must consider the possibility and ease of studying the framework for the preparers of the financial statements. It should consider the numerous training needs that will arise from the adoption of the new framework as it will spark unique demand in all business aspects that will necessitate training for all stakeholders to understand the framework application. Specifically, SEC should consider the effects of the adoption of governance, employee training needs and systems changes, external stakeholders and the changes in disclosure. ("US Securities and Exchange Commission (SEC)", 2016)
IFRS 4-1:
The rules governing revenue recognition are different for both financial frameworks. Under the GAAP framework, income from the sale of goods after the delivery of such goods as per a specific agreement and some reasonable certainty that such fees for the sale will be collected. On the other hand, IFRS requires that the revenue from the sale of goods be recognized at the point when all the risks, rights, and rewards of owning the goods have been transferred from the entity to another party. This implies that once the buyer takes ownership and control of the goods, the entity recognizes the revenue attributable to the sale. Special rules guide revenue from rendered services under GAAP. The revenues from services rendered over a lengthy period are recognized and distributed throughout the period of the service. IFRS, on the other hand, allows the recognition of revenues from long-term services upfront; immediately after the substantial performance has been ascertained. Revenue from contracts under GAAP is recognized once the contract is complete, under the completed contract method. IFRS, on the other hand, does not support the complete contract method for the percentage of completion method which allows the entity to recognize revenues on the actual recoverable costs incurred at any specific time. ("Conceptual Framework for Financial Reporting 2010", 2016)
IFRS 4-2:
The definitions for revenues and expenses under IFRS include gains and losses respectively. Revenues represent the economic benefits accrued during an accounting period such as cash inflows, reduction in liabilities other than equity contributions. Revenues are generated in the ordinary business activities, and the gains thereof explain the increases in the economic benefits. They are not different from the revenues. Expenses are the economic losses that arise in the ordinary course of the business. They also include the losses since they are both characterized by the outward flows of cash or assets depletion. ("Conceptual Framework for Financial Reporting 2010", 2016)
IFRS 7-1:
The effects of the SOX can be categorized into pros and cons. The specific rules that outline how entities should conduct their accounting practices make the companies more accountable. Investors are therefore able to get true and accurate information about their investments and potential opportunities. Investors have an increased level of confidence and trust for the reporting system which had previously started to decline. This has, in turn, created investment comfort for the investors with the information provided under the Act because any financial misrepresentation is charged on the persons behind it. The preparers of financial statements are therefore objective and honest. They are compelled to discharge their responsibilities properly to avoid such legal consequences. (Hanna, 2014)
On the negative side, the Act is too costly to adopt and comply. Business entities wishing to comply with the legislation must pay a lot of monies. The system also lacks a logical framework to guide the implementation of the Act. On the part of investors, the high cost of implementing the requirements of the Act implies a diversion of a significant amount of business funds to non-business avenues. This, in turn, serves as an obstruction that makes an investment in companies adopting the Act less attractive. (Hanna, 2014)
Conclusion
Despite the existence of differences between the GAAP and IFRS frameworks, their main purpose is the presentation of financial information for entities with the utmost accuracy to all interested parties. The proposal to adopt the IFRS in the US will serve a crucial role in the elimination of the existing differences between the two frameworks and work towards a universal global financial reporting framework.
References
Conceptual Framework for Financial Reporting 2010. (2016). Iasplus.com. Retrieved 11 August 2016, from http://www.iasplus.com/en/standards/other/framework
US Securities and Exchange Commission (SEC). (2016). Iasplus.com. Retrieved 11 August 2016, from http://www.iasplus.com/en/resources/regional/sec
Hanna, J. (2014). Forbes Welcome. Forbes.com. Retrieved 11 August 2016, from http://www.forbes.com/sites/hbsworkingknowledge/2014/03/10/the-costs-and-benefits- of-sarbanes-oxley/#3ba741c62776
