Comparing IFRS to GAAP

The International Financial Reporting Standards or IFRS is an accounting standard used in more than 110 countries through the world, and is generally viewed as a system based on principle.

On the other hand, the Generally Accepted Accounting Principles or GAAP framework that is used in the United States is widely viewed as a framework for accounting that is based on rules (Ngyuyen, 2014).

Reconciling Fair Value Measurements

The Financial Accounting Standards Board or FASB, and the International Accounting Standards Board or ISAB have been working for years on a joint project that will create a common measurement and structure for reporting fair value, particularly financial instruments such as derivatives (Metzger, 2013).

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The FASB and IASB are constantly issuing new guidelines that try to rectify the differences between IFRS and GAAP, regarding fair market value. With these new guidelines, the fair value measurement standards are almost the same in practice.

The only remaining differences would be the way they are presented, for example style and spelling. GAAP would refer to a reporting entity, while IFRS would refer to an entity. GAAP would refer to labor costs, while IFRS might show labour costs instead (Metzger, 2013).

Component Depreciation

IFRS requires that each part of a plant, property, or equipment that is a significant portion of the total cost of the asset must be depreciated separately (Kimmel, Weygandt, & Kieso, 2013).

This means that is a company purchases a new factory that has existing machinery installed, if they plan on using the existing machinery it has to be depreciated independently of the structure as it’s own asset. Additionally, the foundation, heating system, cooling system, and roof would all need to be treated as individual assets also.

Unlike IFRS, companies following GAAP are allowed to use component depreciation, but normally do not use this method (Kimmel, Weygandt, & Kieso, 2013).

Revaluation of Plant Assets

IFRS allows for companies to revalue their property, plant, and equipment to fair value in certain situations, whereas GAAP does not allow this practice. This results in the account Revaluation Surplus under IFRS, which is not seen in GAAP.

“Under IFRS, the term reserves are used to describe all equity accounts other than those arising from contributed capital. This would include, for example, reserves related to retained earnings, asset revaluations, and fair value differences” (Kimmel, Weygandt, & Kieso, 2013).

Normally this would not be used or apply unless there was an acquisition by another company.

Development Expenditures

GAAP requires companies to expense any research and development costs by listing them on the income statement. The difference with IFRS is that companies who are using this accounting method are only required to expense the research costs only.

This enables companies under IFRS to depreciate the costs over the useful life that the new development provides. This is optional, once the development reaches completion and the company can begin reporting the development costs as capital expenditures (Kimmel, Weygandt, & Kieso, 2013).

Contingent Liability

IFRS and GAAP both recognize contingent liabilities, which are a potential expense or obligation that has a likelihood of occurring in the future, but has not yet been incurred. Since it has not occurred, these items are not recorded in the financial statements, but should be listed or disclosed in the notes (Kimmel, Weygandt, & Kieso, 2013).

An example would be how the accountant for former NBA player Ron Artest. This player consistently ranked among the leagues most consistent offenders that earned flagrant fouls for overzealous play, which typically resulted in substantial fines by the National Basketball Association.

The likelihood of Ron incurring a potential expense in the future in the form of NBA fines was so great, that his accountant would consider this a contingent liability.

Accounting for Liabilities

Unlike IFRS, the main difference when it comes to accounting for liabilities is that GAAP requires liabilities to be reported in order of liquidity. IFRS requires liabilities to be reported in the reverse order of liquidity on the balance sheet (Kimmel, Weygandt, & Kieso, 2013).

The second big difference is that GAAP allows reporting interest expenses using both the effective interest rate method and the straight-line method. IFRS does not allow the straight-line method, and only allows the effective interest rate method (Kimmel, Weygandt, & Kieso, 2013).

Conclusion

Overall the accounting frameworks of IFRS and GAAP are very similar, but still they have some differences. For example the last in, first out or LIFO method is acceptable under GAAP but not allowed for inventory costs under IFRS. Another main difference is the treatment of intangible assets.

IFRS will only recognize the asset if it has future economic value that can be measured. This type of recognition reinforces the notion that IFRS is a more principles based type of accounting framework (Ngyuyen, 2014).

References

Jerman, M., & Manzin, M. (2008). Goodwill and Its Treatment in Accounts: A Historical Look at Goodwill, Trade Marks & Trade Names by Westphalia Press

Kimmel, P.D., Weygandt, J.J., & Kieso, D.E. (2013). Financial Accounting: Tools for Business Decision Making by Wiley

Metzger, L. (2013). GAAP and IFRS: Reconciling Fair Value Measurements. Retrieved from http://www.theiia.org/fsa/2011-features/gaap-and-ifrs-reconciling-fair-value-measurements/

Ngyuyen, J. (2014). IFRS and US GAAP, with Website: A Comprehensive Comparison by Wiley

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