US GAAP Vs IFRS

By Genna Francesca Squadroni

For those in the business world - particularly in the accounting field - a major issue has surfaced in recent years relating to the differences between Generally Accepted Accounting Principals (GAAP) and the International Financial Reporting Standards (IFRS). Currently, the majority of countries in the world follow International Financial Reporting Standards guidelines; however, the United States still uses Generally Accepted Accounting Principals. This topic has been a main focus because there is a plan for convergence between the two frameworks in the near future. The United States accounting system will undergo drastic changes when this occurs, but in the long-run the idea is to simplify the accounting procedures around the world. The main difference between GAAP and IFRS is that GAAP is considerably rule-based, whereas IFRS is more principal-based which means IFRS has room for interpretation. The specific differences are far too many to cover in a short presentation, however, an explanation of some major differences are mentioned below.

In certain instances, GAAP and IFRS follow different approaches for the determination of specific amounts as well as how these amounts are recognized in financial statements and within the notes. One of these instances occurs in the measurement of inventory. Unlike GAAP which accepts the FIFO, LIFO, and weighted-average methods, IFRS does not accept LIFO. Also, when inventory is recorded on the balance sheet, IFRS requires that it be reported at the lower of historical cost or Net Realizable Value. GAAP, on the other hand, requires inventory to be reported at the lower of historical cost or replacement value. Another difference occurs in the measurement of property, plant, and equipment. Property, plant, and equipment are originally measured at cost. After recognition, however, GAAP and IFRS have variations in how they treat these assets. Under IFRS, PPE can be revalued if there is a higher fair value; GAAP does not allow for any revaluation after recognition.

There are also differences for sales of services, particularly the means in which revenue is recognized. For US GAAP the cost-to-cost percentage of completion method is prohibited unless the contract specifically says otherwise. The completed-performance method is the generally accepted method under GAAP. When the outcome of a service cannot be reasonably estimated then the revenue must be temporarily deferred. For service sales under IFRS the percentage of completion method is followed. When the transaction cannot be reasonably estimated under this framework, the zero-profit model is used and the revenue is recognized to the degree of recoverable expenses taken on. In certain circumstances the outcome may be very uncertain: if this is the case then the revenue must be deferred until a better estimate of the transaction can be made.

Revenue is also recognized differently for warranties. Under Generally Accepted Accounting Principals, revenue for product maintenance is usually deferred and recognized as income on a straight-line basis over the contract life. When the warranty is bought separately or in addition to the original warranty, the revenue is determined through reference to the selling price for maintenance contracts. Under International Financial Reporting Standards, the revenue from the extended warranty will be deferred. The recognition of this revenue will occur over the period that is covered by the warranty.

Construction contracts are also an area in which the recognition of revenue differs between the two accounting frameworks. The preferred method that is most commonly used under US GAAP is the percentage of completion method. However, when a reasonable estimate cannot be made, the completed-contract method is required to be used. The percentage of completion method has two different approaches: the first is the revenue approach and the second is the gross-profit approach. IFRS generally uses the revenue approach under the percentage of completion method. When the construction project cannot be estimated reasonably, the zero-profit method is used because IFRS does not allow the gross-profit method to be used.

As stated above, the details of all the variations and changes that must occur are far too many to cover in a brief presentation. All the differences that were mentioned - although they were few of many - were important in the scope of things. Accounting standards are extremely specific and complicated to understand, hence the reason there is a planned convergence in for the future. There will be much less confusion in the accounting world if some kind of unity exists between most countries. US GAAP is easily the most in depth framework of all the currently existing frameworks. With IFRS having more room for interpretation, it takes away from the rule-based complications that exist within GAAP standards. Hopefully with the convergence there will be more unity and less confusion in terms of accounting all over the world.

Genna Francesca Squadroni

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IFRS Conversion: An Expensive Investment in Professional Training and Development, and Academia

By Raymonda Mouchaham

Transitioning to the global accounting system is a monumental challenge that will cost millions of dollars. As the global economy gains strength, there doesn't seem to be any other option than to prepare for the inevitable. It's a known fact that in order to remain competitive with other international markets, the United States must adapt to the changes of IFRS. These changes will generate significant expenses that go beyond the business of financial reporting. A good portion of expense will be incurred from professional training and development that will need to be implemented industry-wide. How about the cost of upgrades in financial software programs and other technologies? In addition, revisions will need to be made to accounting curriculum in colleges and universities across the nation to reflect IFRS. It's clear to see that the new reporting system will be a costly investment to the financial industry and beyond.

With over 120 nations already using IFRS, it's difficult to conduct business as usual with our international counterparts without converting to the new accounting system. According to D.J. Gannon, a Deloitte & Touche partner, "This is not just a technical accounting exercise... it encompasses a company's entire operations, including auditing and oversight, cash management, corporate taxes, technology and software." The preparations that are required to make the necessary upgrades in communication and software systems are daunting. Think of the vast amount of financial professionals, including regulators, CPAs, investors-to name a few- that will need training to stay current with the new global standards. Not only will the transition require CPAs, financial statement preparers, and auditors to learn the international standards, but actuaries and valuation experts will also need comprehensive training on measuring certain assets and liabilities. Time is money; therefore, the cost of training professionals at all levels in the industry will require a significant investment.

Unfortunately, the majority of CPAs have limited knowledge of IFRS, so this alone could drive the cost of professional training and development well beyond what companies can afford. In today's market, how will this affect cost-conscious CFOs? It doesn't stop there either. The magnitude of the conversion will demand on-going training and development needs throughout its implementation. With the projection of a total conversion estimated at two to three years, costs could be astronomical. This is the reason why professional organizations such as the American Accounting Association and industry groups (KPMG, Deloitte, PricewaterhouseCoopers) opted to introduce IFRS in their training materials, testing, and certification programs, as well as industry publications. With time being a critical factor in the transition, the sooner professionals become familiar with the new standards, the better off the nation is strategically.

Another expense of the IFRS transition centers on academia. The empirical study, "A Cost-Benefit Analysis of the Transition from GAAP to IFRS in the United States," reports that the costs of hiring extra professors are projected to be $100,000-$250,000 per institution. In addition, other costs will be incurred from the hiring of administrative staff that will be responsible for assisting professors with curriculum changes and related issues. With budget cuts in education, who will cover these expenses? Undoubtedly, this will most likely get passed along to the student in the form of a tuition increase. This doesn't include the cost of new textbooks that students will need to purchase. Textbooks are being revised to include material that covers IFRS. The majority of professors will require students to purchase newer editions- so much for purchasing used books at a discount!

Aside from the financial implications of the conversion on academia, there is also the burden of deciding what IFRS material should be covered in a given semester. With volumes of information, no set criteria, and instructors with little exposure to the new standards, how will all of this be set in motion? At this point, there seems to be more questions than answers. In having a true understanding of the overwhelming responsibility being placed upon educational institutions to upgrade their curricula and provide training for professors in IFRS, PricewaterhouseCoopers donation of $700,000 in grants will be put to good use. Other industry leaders must follow in their footsteps if we expect a seamless transition.

For a complete overhaul to IFRS, those in the profession will need to learn the new system. In addition to CPAs, preparers, auditors, actuaries, and valuation experts, educational institutions will also need to prepare for the transition. Many financial resources including publications, software, and other technologies will have to be upgraded to include the new reporting standards. The transition to IFRS will be a costly move that will impact the financial industry for years to come.

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A Uniform Code: GAAP Vs IFRS

By Jason T Showalter

For those who know anything about the accounting field know that when dealing with international business there is always one major problem. This problem is the discrepancies in dealing with Generally Accepted Accounting Principles in the United States and International Financial Reporting Standards in other countries. These two systems contain many differences that cause problems for accountants. Many professionals believe that United States GAAP is the better system of the two. Del Rush, a partner with Frost, PLLC, a group of certified public accountants, discussed the differences between GAAP and IFRS. He said, "Because GAAP is rules-based, what you'll find is that if you were to print all the U.S. rules, the standards would probably be four times as lengthy as the IFRS standards" (Barron). This shows that GAAP looks more thorough than IFRS which Rush claimed was more principles-based.With the lack of uniformity on a global basis, U.S. companies who wish to extend their business internationally will run into a variety of problems because of the varying standards. I will highlight a few of the major differences between the two systems and the problems that these differences cause.

One significant difference between these two systems is that GAAP uses the historical cost principle, whereas IFRS uses fair-value. Generally, it is easier to use historical cost for most reporting situations than it is to use fair-value. When using fair-value to evaluate what number to report, calculations must be made to figure out the market value of the object. In some situations it is difficult to judge what exactly that value should be which means some discretion exists. When discretion is used in accounting practices numbers can be manipulated more easily. Manipulated numbers cause problems because they are usually inaccurate and tend to reflect the business entity in the most positive way possible. In the business world, it is important that financial statements accurately reflect the company's economic position. It becomes very dangerous for investors when companies do not accurately report their true financials.

One of the most impactful differences is that GAAP allows the use of the last in first out method when dealing with inventory, but IFRS does not allow the use of LIFO. The problem this causes is that companies that record their inventory using LIFO have to revalue their inventory which could create some tax liabilities, as well as becoming very time consuming. As GAAP and IFRS try to find middle ground, there has been a recent creation of the "LIFO Conformity Rule." Michael J.R. Hoffman explains, "That's the tax rule permitting use of the Last-in, First-out (LIFO) inventory method for tax purposes, but only if it is also used for financial reporting purposes" (Hoffman). U.S. companies currently using the LIFO method are reluctant to adjust to IFRS for this very reason. Inventory write-downs are also different under both systems. IFRS allows write-downs however; U.S. GAAP does not allow any write-downs for inventory.

Another difference between United States GAAP and IFRS is what is called revenue recognition. Revenue recognition deals with when and how revenues are financially reported. Under U.S. GAAP, there are specific guidelines about what should be considered revenue, how it should be measured and when exactly it should be reported. Conversely, IFRS's standards when it comes to revenue are not as thorough about when it should be reported. With looser guide lines in IFRS, it opens up for interpretation. This can lead to companies reporting higher revenue than those under more specific revenue standards. U.S. GAAP also provides clearer insight to specific industries whereas IFRS lacks industry specific guidance.

With these evident differences the need for a consolidated system of accounting standards becomes clearer. It seems the world is moving towards developing one set of rules, but these various differences present a challenge for which there is no clear answer. In some way all companies will have to change their books to adapt to the new set of rules. It remains to be seen what these rules will demand, but having uniform standards will present many long-term benefits to everyone.

Works Cited:
Barron, Jacob. "The Endless Switch From GAAP To IFRS." Business Credit 113.8 (2011): 4-6. Business Source Premier. Web. 27 Nov. 2012.
Hoffman, Michael J. R., and Karen S. McKenzie. "Speed Bump Or Barricade?." Strategic Finance 91.1 (2009): 34-39. Computers & Applied Sciences Complete. Web. 27 Nov

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