IFRS is a set of principles of international accounting standards that regulate transactions and events reported in financial statements. Unlike GAAP, IFRS is based on principles rather than rules of accounting standards. IFRS includes all the interpretations and standards issued by the IASB and IAS, and IASC; it allows accountants to have greater flexibility and discretion than in GAAP when preparing financial reports (International Accounting Standards Committee, 2001). IFRS is crucial for accountants as it assists in development of transparent, comparable, and quality financial statements through the stipulated principles. It takes the needs of emerging markets in cases of international accounting. It forms a platform for converging regional and global accounting standards (Shamrock, 2012). The principles of IFRS imply a standardized global accounting approach such that the principles applied by accountants do not differ whether in developed or emerging markets.
Overall, IFRS and US GAAP are more similar than different. Being principle based implies that IFRS captures all economics of a transaction better than US GAAP. The difference is observable in intangibles like research and development, and advertising costs, among others (Shamrock, 2012). Under US GAAP acquired intangibles are recognized at a fair value while under IFRS they can only be recognized if the acquired assets have future economic benefits, and with measureable reliability.
The two accounting bodies also differ in treatment of inventory costs. The US GAAP uses the Last-in First-out (LIFO), and First-in First-out (FIFO) inventory approaches while IFRS uses a single inventory approach. This boosts its efficiency in inventory costing that enhances comparability between markets. It also removes the requirements to adjust LIFO inventories when conducting comparative analysis. Another example highlighting their differences is on writing down of inventories (Shamrock, 2012). Under IFRS written down inventories are reversible in future if some criteria are met unlike the irreversibility in US GAAP. Under the latter, once an inventory is written down, any reversals are prohibited by the regulations.
In US, there is no source of GAAP the regulations are derived from a set of principles, preferred practices, and standards established by US standards setters and regulators. The sources of GAPP include the Financial Accounting Standards Board (FASB), Securities Exchange Commission (SEC), and the American Institute of Certified Accountants. Given its dominant role as a source of capital, foreign businesses operating in the economy accustom to using US GAAP (International Accounting Standards Committee, 2001). The regulations are pervasive as they impact on all aspects relating to decision making with respect to the conduct of US businesses, and businesses conducted internationally. For US businesses, the broader their international and foreign entries, the more significant the effects of IFRS are realized. Though not typically states, US GAAP govern US transactions, and business legal instrumentation.
However, no longer can the assumption that US GAAP will continue to be the economy’s means through which business and business relations will be established and evaluated. Most companies, financial institutions, and legal advisors are increasingly deviating from the norm, and considering international accounting standards and their implications on the economy’s accounting standards (Shamrock, 2012). From its representation in the international accounting standards committee, which sets international accounting standards, the accounting standards may shift to implementation of the modern acceptable principles in IFRS (International Accounting Standards Committee, 2001). Both FASB and SEC support convergence of global accounting standards. However, for US to move towards this convergence some differences must be resolved. These differences cannot be resolved until FASB and SEC are sufficiently assured of protection by US GAAP.
REFERENCES.
International Accounting Standards Committee. (2001). International accounting standards explained. New York: Wiley. Top of Form
Shamrock, S. E. (2012). IFRS and US GAAP: A comprehensive comparison. Hoboken (N.J.: J. Wiley.
