There are two primary accounting methods namely, the InternationalFinancial Reporting Standards (IFRS) and the General AcceptedAccounting Principles (GAAS). The International Accounting StandardsBoard (IASB) is in charge of preparations and issuance of the IFRSguidelines. The Financial Accounting Standards Board (FASB) issimilarly responsible for the setting of the GAAP. The United Statesprimarily uses the GAAP method while other several countries globallyadopt the IFRS approach (Gnanarajah 2015, 1).While the two methods share some similarities, there exist majordifferences in account reporting. In this regards, the discussionoffers a comparison element of IFRS and GAAP accounting methods in asubject-by-subject manner.
The Differences of IFRS and GAAP Format of a Statement of Financial
The format of a financial statement under IFRS often varies from abalance sheet presented under GAAP regarding following a particularorder of classifying accounts. The IFRS does not call forclassification of accounts in any particular order in the statementof financial position (Gnanarajah 2015, 5).In fact, IFRS recommends companies to report assets in reverse orderof liquidity. It mainly focuses on giving the users an apparentstructure of the business’s assets, so it begins with the currentand long-term assets. It then proceeds to give information onshareholders’ equity, followed by current and non-currentliabilities The GAAP, on the other hand, requires a particular orderwhere it positions the accounts according to the measure ofliquidity. Regarding liquidity, it implies that highly liquid assetsoccupy the first order (Kimmel, Weygandt &Kieso 2011, 98). The liabilities fill the second order whilethe shareholders equity takes the last position.
Objectivity in Financial Reporting
The IFRS and GAAP conceptual frameworks are very similar followingthe aims of financial reporting. Both bodies focus on providingrelevant information to a broad range of stakeholders. However, IFRSprovides a single objective for all types of entities while GAAPprovides separate targets for both business and non-business entities(Ndeki, Smith & Strickland 2014, 122).First, both IASB and FASB require complete integrity and relevance inthe presentation of financial reporting data. This data should bereadily available and maintained accurately. This presentation,therefore, should render usefulness to the users of the financialreports. Both of the authoritative bodies require that any submissionof accounts conform to the developed guidelines. Where shouldestimates apply, the IFRS and GAAP need them in conservative nature(Kimmel et al., 2011, 65).
Common Terms Synonymous with Common Stock and Balance Sheet underIFRS
The IFRS commonly uses the term “share ordinary capital” ratherthan “common stock” to demonstrate common ownership stakes. Shareordinary capital is identical to common stock, which refers to theequity value accrued by stakeholders in exchange for cash. The“statement of financial position” on the other hand, is thecommonly used phrase under IFRS that similarly refers to the “balancesheet” (Kimmel et al., 2011, 97).Regardless of a slight variation in format, they both illustrate thecomparison of all types of assets to liabilities and equity. The IFRSfavours the common use of the statement of financial position becauseit is more expressive of the actual purpose of the declaration.
Issues that SEC must consider in defining the approval of IFRS
Firstly, it is worthy to note that the United States is a powerfuleconomic engine at world level. The moves to change the traditionalGAAP method of accounting would, therefore, be a significantundertaking since SEC would need to consider presenting the UnitedStates businesses with a compelling set of benefits that will arisefrom the switch. SEC will need to factor in the millions of companiesthat apply the GAAP method as well as the accounting firms that coachthe financial professionals with conventional rules (Kimmelet al., 2011, 159).
Secondly, SEC must consider the transition cost of adopting theIFRS including the additional expenses of advancing the currentbookkeeping practices. The United States corporations are more likelyto incur billions of dollars for the implementation and adoption ofthe new reporting method. The adoption of IFRS will require newauditing requisites, new computerised bookkeeping systems and immenseinvestment in training employees. Additionally, companies that offerdatabase systems and accounting software will need and revamp of thetechnology (Lemus 2014, 2-3).
IFRS versus GAAP Revenue Recognition
Both the IFRS and GAAP rules regarding revenue recognition dealwith how and when to record income resulting from the finality of anearning process (Lemus 2014, 4). However, the rules differ in away.The IFRS holds are more general stand as compared to GAAP when itcomes to revenue recognition. It takes the stance that auditor’sdocument revenue when the economic conditions are significant. Following the IFRS approach, this revenue must be highly feasible torun the business in the future with sufficient degrees of precision.The GAAP, on the other hand, maintains revenue recognition on groundssignificantly objected on various industries. For instance, thefashion industry will face different revenue recognition than aconstruction company (Ndeki et al., 2014,121-122).
Meaning of Revenues and Expenses under IFRS
Under the IFRS, revenue refers to the total figure amounting of theeconomic benefits as an outcome of the typical business operations.This principle similarly applies to the expenses thus do not includegains or losses given that they do not contribute to the operatingactivities. For example, if a worker experiences increase attributingto book stock investment, it is not recorded as an operatingactivity. This item will be reported separately to show its indirectimpact on operational performance.
The Pros and Cons of SOX Act (2002)
The need to improve transparency in financial account reporting andreducing top-level corporate fraud led to the development of the SOXof 2002 as an additional rule for the publicly traded companies. TheAct is effective lowering the risk that the investors in UnitedStates face. It also creates a stable financial system that deterscorporate scam (Kimmel et al., 2011, 8).While the reasons for the formation of the Act are advantageous, theextra costs incurred in additional financial reporting and thecomplexity in compliance weighs the benefits down. This situationencourages foreign investment. Even though some businesses have optedfor the offshore operation to avert this law, the benefit of doing sooutweighs the negative effect of the law requirements (Gnanarajah2015, 8).
Firms depend on financial reports and disclosures to communicatetheir performance primarily to the debtors, creditors andstakeholders and the public. The United States adopted the GAAPapproach with the inception of SEC while other states apply the IFRSapproach. The two methods share similar objectives in the conceptualframeworks but differ significantly in the arrangement of informationas observed in the statement of financial position reporting. Inaddition, the methods adopt the use of different terms such asordinary share capital and common stock to refer to the same thing.The application of IFRS seems simpler than GAAP although the latteris more detailed than the former.
Gnanarajah, R. (2015). U.S. Capital Markets andInternational Accounting Standards: GAAP Versus IFRS. CongressionalResearch Service.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E.(2011). Accounting: Tools for businessdecision making (4th ed.). Hoboken, NJ:John Wiley & Sons.
Lemus, E. (2014). The Similarities andDifferences between the Financial Reporting Standards under theUnited States. GAAP versus IFRS. Glob AlJournal Of Management And Business Research: Accounting AndAuditing, 14(3),1-7. http://dx.doi.org/ISSN 2249 – 4588
Ndeki, S., Smith, A., & Strickland, A. (2014).Differences and Similarities Between IFRS and GAAP on Inventory,Revenue Recognition and Consolidated Financial Statements. Journal Of Accounting And Finance, 14(1),120-123.