Currently, there exist two major systems of accounting; the United States Generally Accepted Accounting Principles (U.S. GAAP) and the international Generally Accepted Accounting Principles (iGAAP). As both the designations propose, the U.S. GAAP is mainly applied in the United States whereas iGAAP provides the guiding principles for other countries internationally. The two systems portray great similarities in terms of language, structure, and procedures; however, there exist major differences such that it is highly debatable which one is superior to the other. This paper intends to evaluate the resemblances and differences between the iGAAP and the U.S. GAAP with regard to the balance sheet.
Starting with the similarities, both the U.S. GAAP and iGAAP list similar several documents in the financial statements. That is cash flow and income statements, balance sheet, footnotes, and changes in equity are all present in the U.S. GAAP and iGAAP. Furthermore, both systems articulate that variations in shareholders’ equity should be documented. Ernest and Young (2012) dictate that in U.S. GAAP, changes in shareholder equity are presented in the notes of financial statements while in iGAAP a separate statement is written. Fundamentally, the two accounting standards possess similar models with regards to materiality and consistency that individuals have to consider when preparing financial documents.
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Conversely, there are a lot of differences between the two systems regarding balance sheet operations alone. Format wise, in the U.S. GAAP there is no universal layout in which to formulate the balance sheet as long as there is a proper representation of material components. Exceptions are public companies which are required to follow The Securities and Exchange Commission (SEC) guidelines (Putra, 2008). However items are listed in decreasing order of liquidity. In the iGAAP items are listed in order of liquidity and even though there is no prescribed standard layout a list of minimum line items are included.
Additionally, in iGAAP, there must be a current and noncurrent distinction unless where the balance sheet presents liquid items only. Assets and liabilities are declared current if they are to be used or be cleared within 12 months respectively. On the contrary, they are declared noncurrent/long term if they will not be realized or settled within a year. U.S. GAAP gives the management a choice between a classified and a non-classified balance sheet. Where a classified balance sheet is applied then the rules are parallel to iGAAP. A non-classified balance sheet, however, lists assets and liabilities with no classification, therefore, no current and noncurrent distinction.
Moreover, another significant difference between iGAAP and U.S. GAAP is that long-term tangible assets are reported with regards to their fair value in contrast to historical cost. Historical cost refers to the price at which the asset cost when it was acquired. However, fair value takes depreciation into account thus it represents the actual current market value of the asset were it to be sold (Ernest & Young, 2012). The main advantage of using historical cost in U.S. GAAP is that it can be verified. This is because the value at the time of purchase is linked to tax, contracts, and payments and so on whereas fair value is useful in calculating solvency of a firm.
In conclusion, the U.S. GAAP and iGAAP possess similarities that enable their respective entities to comprehend the other standard with little study. Nonetheless, the differences that exist are imperative and thus imprudent to ignore. Custodians of the U.S. GAAP and iGAAP have been in close partnership to merge principles of the two accounting systems. Even though many accounting regulations have already been fused there is still a long way to go.
References
Ernst & Young. (2012). US GAAP vs. IFRS: The basics. Ernst & Young LLP . Retrieved from http://www.ey.com/Publication/vwLUAssets/US_GAAP_v_IFRS:_The_Basics/$FILE/US%20GAAP%20v%20IFRS%20Dec%202011.pdf.
Putra, L. D. (2008). IFRS Vs GAAP: Balance Sheet and Income Statement . Retrieved from http://accounting-financial-tax.com/2008/06/ifrs-vs-gaap-balance-sheet-and-income-statement/.
