Comparing IFRS to GAAP - Coursework Example

Comparing IFRS to GAAP Introduction International Financial Reporting Standards (IFRS) refers to the accounting standards set up by the International Accounting Standards Board (IASB) and are applicable in most parts of the globe. Generally Accepted Accounting Practices (GAAP) is the accounting rules applicable in the United States. Due to Mergers and acquisitions, Industry, globalization, and size of the enterprise, IFRS has a lot of impact on companies and has created the necessity for adoption of IFRS as international accounting standards (Kimmel, 2013). This document will focus on specific differences and similarities between IFRS and GAAP as applicable in businesses across the globe. Although GAAP and IFRS are similar in their application and usually results to uniform results, there are slight variations arise where GAAP and IFRS offer the options due to the nature of the business, company’s interpretation of principles, industry practices and details of transactions (Shamrock, 2012). IFRS 8-1: Criteria used by FASB and IASB for fair measurement of financial instruments. The FASB and IASB have adopted criteria for fair measurement of financial instruments in order to reflect the fair value of business assets and liabilities. Fair value is used to refer to the current market value of the financial instruments (Shamrock, 2012). The boards have adopted two steps to ensure fair value measurements whereby businesses are supposed to record particular financial instruments to reflect their current market value. The approaches include “disclosure of the fair value information in the notes” and “fair value option” that allows companies to record particular financial instruments at fair value in the financial report (Kimmel, 2013). However, IFRS differ from US GAAP in some ways because IFRS examines specific loans and debtors to ensure the same is not impaired, and the same loan and debtors are examined collectively to establish whether they are not impaired (Shamrock, 2012). In addition, GAAP and IFRS employ different criteria for recording a factoring transaction whereby, IFRS applies the combination of methods dealing with reward, risk and loss control whereas GAAP applies the loss of control as the chief method. Also, GAAP takes into consideration incomplete derecognition of receivables while IFRS does not allow incomplete derecognition of receivables (Kimmel, 2013). IFRS 9-1: Component Depreciation Depreciation refers to distribution or spread of costs of assets over its useful life according to IFRS (Shamrock, 2012). Depreciation reflects the value of assets over a given period and depicts the potential of that asset to generate income for the business. It portrays the diminishing utility of the asset in business. Depreciation of components is essential when making major financial decision such as during mergers and acquisitions, when preparing the financial report at the end of trading period and when disposing of or acquiring additional depreciable assets to reflect the current value of the assets (Shamrock, 2012). Both GAAP and IFRS allows applies similar depreciation approaches such as straight-line and unit –of activity methods. However, in IFRS requires part of assets with significant depreciable part that has different useful life to be depreciated independently whereas in GAAP such practices are not implemented (Kimmel, 2013). IFRS 9-2: Plant Assets Revaluation Assets revaluation is a business technique of establishing the actual value of fixed assets of the business following major variations in fair market value as required by the IFRS in order to establish fair value of fixed assets owned by the business. Revaluation is essential when business intends to regain the original capital assets of the business by replacing the depreciated value, when they intend to acquire external borrowings, when disposing of its assets and during mergers and acquisitions (Shamrock, 2012). IFRS 9-3: Differences between development expenses and development costs According to Shamrock (2012), development expenses refer to resources utilized or consumed by the business during the creation of new products or services. For example, administrative salaries, rent, utility bill, etc. On the other hand, development cost is used to refer to resources used in the acquisition of new items for the business but has not been consumed. For example, labor, overhead cost, material cost, etc. IFRS 10-2: Contingent Liabilities According to IFRS According to IFRS contingent liability, refers to liabilities payable by the company in the future and whose period of payment are out of control of the business. For example, a legal suit filed by an employee against the company after sustaining injuries at the workplace whose period is dependent on the court’s decision (Kimmel, 2013). IFRS10-3: Similarities and Differences between GAAP and IFRS with Respect to the Accounting for Liabilities. IFRS recognizes liabilities as current or fixed depending on their liquidity. Current liabilities are settled within a period of one year while fixed liabilities are obligations that extend beyond one year. Liabilities are recorded after assets in order of liquidity. IFRS applies “effective-interest method for amortization of bond discounts and premiums” while in GAAP amortization is not required. Unlike GAAP, IFRS does not use discount account to show the bond at its net amount (Shamrock, 2012). According to Kimmel (2013), both IFRS and GAAP rely on the historical cost or the initial value at which the assets and financial instruments were purchased when determining the cost of assets. Both methods capitalize the interests expenditures sustained during construction including self-constructed assets like labor and raw materials. Both GAAP and IFRS recognizes liabilities as current business obligations occurring from previous business activities whose settlements is expected to cause resource outflows in the business. Both IFRS and GAAP require liabilities to be recorded in order of liquidity. Also, preferred stocks are recorded as debt under GAAP and IFRS. Conclusion IFRS and GAAP accounting standards are almost similar except for slight variations determined by nature and size of business, location and interpretation of the standards. IFRS is preferred for global financial reporting due to its flexibility offering wide applicability across various geographical locations and nature of business. The main differences occur in business valuation, liability and depreciation of assets. The flexibility of IFRS has resulted to cross-border application and is preferred for international accounting standards. References Kimmel, P. D. (2013). Accounting Tools for the Business Decision Making 5E+ WileyPlus Registration Card (7th Ed.). Hoboken, NJ: John Wiley & Sons, Incorporated. Shamrock, S. E. (2012). IFRS and US GAAP: A Comprehensive Comparison. Hooken, NJ: John Wiley & Sons: 1-356. Read More