The International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) are two set of accounting rules that regulate financial reporting. The IFRS is adopted in more than 120 countries around the world (IFRS, n.d.). GAAP is developed and used in United States. The two sets of principles have many common features. In fact, there is more commonality than differences between IFRS and GAAP. IASB and FASB, two standard-setting bodies for IFRS and GAAP respectively have started a convergence process with the aim to develop a universal set of rules. However, some important difference between IFRS and GAAP. Some of the differences are discussed below.
1. Differences in balance sheet/statement of financial position presentation.
Under IFRS the statement of financial position is presented in the “reverse liquidity order”. The non-current assets are on top, and cash and cash equivalents is the last item under the Assets section. Equities section is presented after the Assets and is followed by the Liabilities section. As with the assets, the non-current liabilities are listed before the current liabilities.
2. IFRS and GAAP difference in conceptual framework.
Both systems have more in common than they are different. IFRS and GAAP are aimed at achieving objectivity in financial statements. The basic difference between the conceptual frameworks of the two sets of accounting rules is the underlying principle. IFRS is a principal based system, while GAAP is the rules based system. In terms of the objective of reporting, GAAP is tailored more for the outside users such as investors and creditors, while primary users of the IFRS reports are often government bodies or other official entities.
3. Synonyms with common stock and balance sheet.
Under IFRS common stock is referred to as share capital ordinary. The balance sheet under IFRS is called the statement of financial position.
4. Issues SEC must consider if adopting IFRS.
There are several theoretical and practical issues that SEC has to consider. One issue is the funding of IASB. It is done through the voluntary donations, while FASB is funded through fees from securities issuers. SEC believes that funding entities might have a considerable influence over IASB decisions.
Another issue is US tax code. If IFRS is adopted, it has to be changed significantly. For example, IFRS does not allow use of LIFO inventory costing system, while it is allowable under tax law (Tysiac, 2012).
Switching to IFRS will require an across-the-board training of accounting and auditing staff in the United States. It is unclear who will bear the cost of such training.
5. Revenue recognition under IFRS and GAAP.
Under IFRS the revenue is recognized when the risk and reward of ownership has been transferred to the buyer, revenues can be measured reliably and the probability that the economic benefits will flow to the selling company is high.
Under GAAP revenue is recognized when the risk and reward of ownership has been transferred, the fee for the transaction is fixed and there is a reasonable assurance that it will be collected, and there is conclusive evidence of the sale.
Under GAAP, application of long-term contract accounting for non-construction services, such as services sold with software, is not permitted. Under IFRS, stage of completion method can be used whenever revenues can be measured reliably.
GAAP has specific criteria to recognize revenue for multiple elements transaction. IFRS requires an element to have its own commercial substance to be recognized separately.
Under IFRS the recognition of deferred receipts of receivables is treated as financial transaction and future receipts must be discounted. Under GAAP discounting is mandatory only under special circumstances.
For construction contracts, completed contract method is allowed under GAAP, but prohibited under IFRS (Ernst and Young, 2011).
6. Gains and Losses under IFRS.
IFRS definition of revenue makes a specific reference to ordinary operating activities. Gains and losses are usually attributable to transactions that do not fall under the ordinary operations category, therefore they are not part of the revenue under IFRS.
7. Competitive implications of SOX.
SOX was adopted to reduce the risk of fraud committed by the top management after several large scandals, like Enron. It puts US public companies at a disadvantage because it requires additional reporting costs to stay in compliance if compared to international companies registered outside the United States. However, the investors appreciate the additional safety provided by the SOX as it does minimize the risk of corporate fraud. Therefore, the disadvantage of having additional reporting requirements is balanced by more fraud protection.
IFRS and GAAP are based on the same principles. The framework of both systems is very similar. The regulating bodies of both sets of rules are working together on the convergence process aimed at eliminating existing differences. However, there are serious considerations that need to be resolved before the uniform accounting regulation will appear. One problem is the SOX that requires additional reporting for US public companies, another is US tax code. Due to these issues, the convergence process has slowed down. However, the IFRS/GAAP differences are not significant enough to prevent US investors from investing in companies reporting under IFRS and international investors investing in US companies.
References
IFRS. (n.d.) IFRS. FAQ. AICPA IFRS Resources. Retrieved April 15, 2016, from: http://www.ifrs.com/ifrs_faqs.html
Tysiac, Ken. (2012) Still in flux: Future of IFRS in U.S. remains unclear after SEC report. Journal of Accountancy. Retrieved April 15, 2016, from: http://www.journalofaccountancy.com/issues/2012/sep/20126059.html
Ernst and Young. (2011). US GAAP versus IFRS.
