Here in the United States of America accountants follow GAAP, or Generally Accepted Accounting Principles when they report, prepare, and present any financial statements. Although GAAP is not regulated or written law by the US government the SEC, or Securities Exchange Commission has deemed it necessary that all financial reporting follow these guidelines. Outside of the United States the guidelines followed by accountants is what is known as IFRS, or International Financial Reporting Standards. IFRS is the basic set of rules and standards that must be followed when reporting financial statements and like GAAP, is not written law but also deemed necessary by IASB, or the International Accounting Standards Board. These two sets of standards contain many similarities and many differences that will be looked at throughout this paper.
One of the many differences we see between GAAP and IFRS deals with revenue recognition and exactly when it is okay to do so under each set of standards. According to PWC, and their analysis of IFRS and US GAAP, "Under GAAP revenue recognition is based on fixed or determinable pricing criterion, which results in contingent amounts generally not being recorded until the contingency is resolved." The difference between what is seen with GAAP and IFRS when it comes to revenue recognition is compared to recognizing revenue when the contingency is resolved, IFRS uses the reliability of revenue in question along with the possible positive benefits that come along with the transaction to recognize revenue. Due to IFRS way of recognizing revenue, it is usually recognized earlier under these set of standards than it would be under GAAP.
After looking at how revenue is recognized it is now time so shift to the other side of the spectrum and see just what differences there are between IFRS and GAAP when it comes to expense recognition. In general there is one major difference when it comes to the reporting of expenses and when they may be allocated. According to the SEC, the major difference is that if costs are used for the benefit of something over multiple periods they may be allocated in each individual period under GAAP. Under IFRS however, those costs must be recognized in the period that they were incurred.
Another difference that is seen between IFRS and GAAP commonly used in businesses around the world is how each requires the reporting of a change in residual value of a property, plant, and equipment asset. Under IFRS if the residual value of a PP&E asset changes, whether it is an increase, or decrease it must be recorded as a change in estimate. The difference between IFRS and GAAP here is that under GAAP there is no standard when dealing with this issue and business may deal with it as they please. Research by the SEC has shown however though that, "A change in residual value generally is recorded only if the residual value has decreased." (SEC Staff) when in reference to accounting under GAAP.
The argument has also existed since both set of standards were created as to which system is better. Just like any argument each side raises good positive aspects about itself as well as valid negative aspects about the other. According to Stephen G. Austin and Norbert Tschakert, both CPA, MBA at Swenson Advisors and San Diego State University respectively, under both systems we have seen epic scandals with GAAP being headlined by AIG and IFRS being headlined by a scandal in Societe Cenerale. Even though the argument continues to go on to this day it has been seen that lately the SEC has been trying to incorporate IFRS into a new system that they hope the whole world can one day use. Due to international trading and the USA consistently doing business with international companies as well as setting up subsidiaries all over the world it has become evident that in the near future, a world-wide set of accounting standards is necessary in order to keep everyone on the same page. Not only will these new standards keep everyone on the same page but simplify accounting throughout the world and avoid confusion as much as possible when dealing with international financial reporting.
Bibliography
Austin, Stephen G., and Norbert Tschakert. Major Differences in US GAAP and IFRS and Latest Developments. Publication. San Diego, 2009. Web. http://www.swensonadvisors.com/.
IFRS and US GAAP; Similarities and Differences. Oct. 2011. PWC Staff Letter.
United States of America. Securities and Exchange Comission. Chief Accountant. A Comparison of US GAAP and IFRS. November 16, 2011. Print. http://www.sec.gov/
Kyle Hartranft
April 8, 2012
Kyle Hartranft
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