U.S. GAAP vs. IFRS
A common priority of the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) is deciding on a common set of high quality global accounting standards. Since 2002, these boards have been working on converging two sets of accounting standards into one global standard. The two sets of accounting standards IASB and FASB have many similarities and differences. However, as of now the two boards have been able to agree on everything except for four topics: leases, insurance, financial instruments, and revenue recognition. Throughout this article the characteristics of each board, similarities and differences between the two, and the big four topics keeping GAAP and IFRS from converging will be discussed.
Generally Accepted Accounting Principles (GAAP) is a mixture of over 2,000 documents that have been developed over the last 70 years or so (Kieso). This mixture includes APB opinions, FASB Standards, and AICPA Research Bulletins. Some of the different types of documents that GAAP comprises of are: AICPA Accounting Interpretations, FASB Implementation Guides (Q and A), widely recognized and prevalent industry practices, FASB technical bulletins, FASB Emerging Issues Task Force, AICPA Statements of Position, APB Opinions, AICPA Accounting Research Bulletins, etc (Kieso). The most powerful force that influenced the development of GAAP is a user group. These consist of those most interested in or affected by accounting rules. GAAP is as much a product of political action as it is the careful logic or empirical findings. The various user groups that apply pressure to FASB and GAAP are: Business entities, CPAs and accounting firms, AICPA, Academicians, Investing public, Financial community, Preparers, Government, and Industry associations. Lastly, this set of rules is used widely throughout the United States.
International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation for public company financial statements. Approximately 120 nations permit or require IFRS for domestic listed companies. IFRS allows its followers to follow a uniform set of principles for reporting standards. In addition, IFRS requires the use of certain financial statements. Examples of these statements include statement of financial position, comprehensive income, changes in equity, and cash flows. Lastly, IFRS is more principle-based and broad with few specifics and more judgments.
According to "AICPA IFRS Resources," although U.S. GAAP and IFRS seem relatively similar, they also have many differences. Throughout the years, the extent of the specific differences has dramatically shrunk. The greatest difference between U.S. GAAP and IFRS is IFRS requires much less detail. Also, unlike U.S. GAAP, IFRS does not permit Last In First Out (LIFO) as an inventory costing method. Additionally, IFRS uses a single-step method for impairment write-downs rather than the two-step method used by U.S. GAAP. This however causes write-downs to occur more frequently. IFRS also has a different probability threshold and measurement objectives for contingencies from U.S. GAAP. Another more common difference between the two rule sets is IFRS guidance regarding revenue recognition is less extensive than GAAP and contains little industry specific instruction. This last common difference leads into the four most common differences that are also causing IFRS to be unable to converge with U.S. GAAP.
The four major differences causing IFRS to not be able to converge with GAAP are leases, financial instruments, revenue recognition, and insurance. The two accounting standards are having difficulty deciding on a single, principle based revenue reporting standard causing the need for improvement before this issued is resolved and allow convergence on this topic. Additionally, both IFRS and GAAP are struggling to provide financial statement users with a more timely and representative depiction of a company's involvement in financial instruments. Both IFRS and GAAP have proposed solutions to the financial instrument disagreement however they are still unable to completely converge with this topic. Lastly, insurance is standing in the way of IFRS and GAAP from converging. The major disagreement these two boards are having on the topic of insurance is slowly ending due to both of the boards working together to develop a model that would reflect current estimates of the amount necessary to fulfill an insurance obligation.
In conclusion, although there are differences causing convergence between U.S. GAAP and IFRS to delay, each day the two boards are getting closer to deciding on similar principles and rules. It is still unclear as to when the Securities Exchange Commission (SEC) will begin a slow process approach with the IFRS-GAAP convergence. If the convergence does occur, organizations will have to edit their fixed assets and make any necessary changes. Since it is unknown when the convergence will occur, it is recommended that organizations start considering a method to complete the time-consuming task of editing fixed assets.
Works Cited
"AICPA | Www.IFRS.com." International Financial Reporting Standards (IFRS). N.p., n.d. Web. 18 Nov. 2013. <http://www.ifrs.com/Backgrounder_GAAP_IFRS.html>.
"Convergence between IFRSs and US GAAP." Convergence between IFRSs and US GAAP. N.p., n.d. Web. 18 Nov. 2013. <http://www.ifrs.org/Use-around-the-world/Global-convergence/Convergence-with-US-GAAP/Pages/Convergence-with-US-GAAP.aspx>.
"FASB, Financial Accounting Standards Board." FASB Website Error Page. N.p., n.d. Web. 18 Nov. 2013. <http://www.fasb.org/jsp/FASB/Page/SectionPage>.
"IFRS." IFRS. Haub School of Business, n.d. Web. 18 Nov. 2013. <http://www.sju.edu/int/academics/hsb/accounting/IFRS.html>.
"IFRS Versus GAAP: Potential Convergence of Competing Standards Could Transform Fixed Asset Management." IFRS Versus GAAP. BNA Software, n.d. Web. 18 Nov. 2013. <http://bnasoftware.com/Software_Resource_Center/Articles/IFRS_Versus_GAAP_Potential_Convergence_of_Competing_Standards_Could_Transform_Fixed_Assets_Management.asp>.
Weygandt, Jerry J., and Terry D. Warfield. "Chapter One: FInancial Accounting and Accounting Standards." Intermediate Accounting. By Donald E. Kieso. 15th ed. N.p.: Wiley, 2013. 13-20. Print.
A common priority of the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) is deciding on a common set of high quality global accounting standards. Since 2002, these boards have been working on converging two sets of accounting standards into one global standard. The two sets of accounting standards IASB and FASB have many similarities and differences. However, as of now the two boards have been able to agree on everything except for four topics: leases, insurance, financial instruments, and revenue recognition. Throughout this article the characteristics of each board, similarities and differences between the two, and the big four topics keeping GAAP and IFRS from converging will be discussed.
Generally Accepted Accounting Principles (GAAP) is a mixture of over 2,000 documents that have been developed over the last 70 years or so (Kieso). This mixture includes APB opinions, FASB Standards, and AICPA Research Bulletins. Some of the different types of documents that GAAP comprises of are: AICPA Accounting Interpretations, FASB Implementation Guides (Q and A), widely recognized and prevalent industry practices, FASB technical bulletins, FASB Emerging Issues Task Force, AICPA Statements of Position, APB Opinions, AICPA Accounting Research Bulletins, etc (Kieso). The most powerful force that influenced the development of GAAP is a user group. These consist of those most interested in or affected by accounting rules. GAAP is as much a product of political action as it is the careful logic or empirical findings. The various user groups that apply pressure to FASB and GAAP are: Business entities, CPAs and accounting firms, AICPA, Academicians, Investing public, Financial community, Preparers, Government, and Industry associations. Lastly, this set of rules is used widely throughout the United States.
International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation for public company financial statements. Approximately 120 nations permit or require IFRS for domestic listed companies. IFRS allows its followers to follow a uniform set of principles for reporting standards. In addition, IFRS requires the use of certain financial statements. Examples of these statements include statement of financial position, comprehensive income, changes in equity, and cash flows. Lastly, IFRS is more principle-based and broad with few specifics and more judgments.
According to "AICPA IFRS Resources," although U.S. GAAP and IFRS seem relatively similar, they also have many differences. Throughout the years, the extent of the specific differences has dramatically shrunk. The greatest difference between U.S. GAAP and IFRS is IFRS requires much less detail. Also, unlike U.S. GAAP, IFRS does not permit Last In First Out (LIFO) as an inventory costing method. Additionally, IFRS uses a single-step method for impairment write-downs rather than the two-step method used by U.S. GAAP. This however causes write-downs to occur more frequently. IFRS also has a different probability threshold and measurement objectives for contingencies from U.S. GAAP. Another more common difference between the two rule sets is IFRS guidance regarding revenue recognition is less extensive than GAAP and contains little industry specific instruction. This last common difference leads into the four most common differences that are also causing IFRS to be unable to converge with U.S. GAAP.
The four major differences causing IFRS to not be able to converge with GAAP are leases, financial instruments, revenue recognition, and insurance. The two accounting standards are having difficulty deciding on a single, principle based revenue reporting standard causing the need for improvement before this issued is resolved and allow convergence on this topic. Additionally, both IFRS and GAAP are struggling to provide financial statement users with a more timely and representative depiction of a company's involvement in financial instruments. Both IFRS and GAAP have proposed solutions to the financial instrument disagreement however they are still unable to completely converge with this topic. Lastly, insurance is standing in the way of IFRS and GAAP from converging. The major disagreement these two boards are having on the topic of insurance is slowly ending due to both of the boards working together to develop a model that would reflect current estimates of the amount necessary to fulfill an insurance obligation.
In conclusion, although there are differences causing convergence between U.S. GAAP and IFRS to delay, each day the two boards are getting closer to deciding on similar principles and rules. It is still unclear as to when the Securities Exchange Commission (SEC) will begin a slow process approach with the IFRS-GAAP convergence. If the convergence does occur, organizations will have to edit their fixed assets and make any necessary changes. Since it is unknown when the convergence will occur, it is recommended that organizations start considering a method to complete the time-consuming task of editing fixed assets.
Works Cited
"AICPA | Www.IFRS.com." International Financial Reporting Standards (IFRS). N.p., n.d. Web. 18 Nov. 2013. <http://www.ifrs.com/Backgrounder_GAAP_IFRS.html>.
"Convergence between IFRSs and US GAAP." Convergence between IFRSs and US GAAP. N.p., n.d. Web. 18 Nov. 2013. <http://www.ifrs.org/Use-around-the-world/Global-convergence/Convergence-with-US-GAAP/Pages/Convergence-with-US-GAAP.aspx>.
"FASB, Financial Accounting Standards Board." FASB Website Error Page. N.p., n.d. Web. 18 Nov. 2013. <http://www.fasb.org/jsp/FASB/Page/SectionPage>.
"IFRS." IFRS. Haub School of Business, n.d. Web. 18 Nov. 2013. <http://www.sju.edu/int/academics/hsb/accounting/IFRS.html>.
"IFRS Versus GAAP: Potential Convergence of Competing Standards Could Transform Fixed Asset Management." IFRS Versus GAAP. BNA Software, n.d. Web. 18 Nov. 2013. <http://bnasoftware.com/Software_Resource_Center/Articles/IFRS_Versus_GAAP_Potential_Convergence_of_Competing_Standards_Could_Transform_Fixed_Assets_Management.asp>.
Weygandt, Jerry J., and Terry D. Warfield. "Chapter One: FInancial Accounting and Accounting Standards." Intermediate Accounting. By Donald E. Kieso. 15th ed. N.p.: Wiley, 2013. 13-20. Print.
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