Globally, accounting standards have been diverse for a long time. With globalization, the need for harmonization of the varying standards became apparent. Therefore, harmonization of existing accounting was not only understandable but also indispensable (PwC, 2014). Two main standards have since emerged. These distinctive standards are the Generally Accepted Accounting Principles (GAAP), which is used primarily in the United States (U.S) and International Financial Reporting Standards (IFRS). The two have been set by the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) respectively.
The first distinction between the two is that IFRS is principle-based while GAAP is rules-based. The IFRS has been recognized as a better measure of a transaction as opposed to the GAAP because it places emphasis on principles. Subsequently, IFRS has been adopted by many countries globally as opposed to GAAP, which is dominant in the U.S. Efforts geared towards convergence of the two standards, led by their respective setters, are currently underway. While there has been some considerable traction, numerous challenges have been encountered (PwC 2014; KPMG, 2014). A recent proposal by the U.S Securities and Exchange Commission (SEC) has acknowledged that the U.S is considering adopting IFRS. However, SEC has not set a timeline. The variances between IFRS and GAAP, which are significant, are still under scrutiny before the adoption can take place. This essay, therefore, attempts to compare the two accounting standards.
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The growing popularity of IFRS globally versus its adoption in the U.S
Most capital markets globally currently emphasize on the use of IFRS, or a slight deviation from it, to complete financial statements (PwC, 2014). This recognition explains its noted popularity. In the US, the process of adoption of IFRS is currently underway. However, the mandatory adoption of IFRS by US companies remains uncertain. The reluctance of the U.S to make IFRS mandatory will affect their businesses significantly. Public companies might be exempted from the need for IFRS in the short term. Due to IFRS's growing relevance in the US, adoption of IFRS will be inevitable in the long term. These companies will be affected to different degrees, and at varying times depending on the industry, size, scope of merger and acquisition (M&A) activity, topographical makeup and global expansion plans.
Although the reasons for adoption of IFRS in the U.S are valid, SEC has to address some key concerns before it can recommend the adoption (SEC, 2011). First, SEC will have to highlight the benefits of IFRS in the U.S so as to justify the adoption since the switch from GAAP to IFRS will cost the U.S millions of dollars. The SEC should indicate the value of IFRS financially, in the short term and long term. Thirdly, the requirements for the switch will need to be clarified. This is especially regarding technology, expertise, infrastructure among other parameters. Overall, SEC will be required to assess the potential advantages vis-à-vis the burden of the switch to IFRS for US based businesses.
Comparing IFRS to GAAP
IFRS’s statement of financial position vs. GAAP’s b alance sheet
In IFRS's statement of the financial position, no particular classification or order of accounts is needed. The reporting of company assets is also in reverse of the liquidity order so at to make the asset structure understandable to anyone looking that the financial statement. The assets are reported first, followed by stakeholder equity and lastly the liabilities. In GAAP, the ranking of all accounts depends on their respective amount of liquidity. Therefore, cash, which has a high liquidity, is likely to come first. Likewise, stakeholder equity is the last to be recorded on the balance sheet.
O bjectives of financial reporting under IFRS and GAAP conceptual frameworks
Objectively, both IFRS and GAAP conceptual frameworks agree that the information given in financial reports must be relevant and faithfully represented. The core difference between IFRS and GAAP regarding financial reporting, therefore, is that under IFRS, a focus is maintained on the relevance of information across multiple and independent countries (KPMG, 2014) while GAAP focuses on the US market environment, which it is mandated to satisfy.
Common t erms under IFRS that are synonymous with common stock and balance sheet
The statement of financial position under IFRS synonymously refers to the balance sheet. Though their formats differ, the two documents present comparisons between assets and liabilities, as well as equity. The term ‘statement of financial position' is preferred under IFRS since it clearly spells out the purpose of the document. Common stock, on the other hand, is synonymously referred to as Share Capital Ordinary. The term is common in the EU and hence is mostly used under IFRS.
R evenue recognition under IFRS and GAAP
Principles of revenue recognition are highly directed under GAAP. The direction is based on the specific industry. For instance, a construction company faces separate principles compared to a company dealing with drugs (PwC, 2014). On the other hand, IFRS is more generalized in that once revenue is significant economically, it can be recorded. In this case, there should be a high probability for the revenue to get into the company for it to be recognized. Likewise, the level of accuracy in measuring the revenue should be high.
R evenue and expense under IFRS
The effects of remeasurements are immediately documented in Other Comprehensive Income (OCI) under IFRS. Consequently, gains or losses are not recognized in profit or loss respectively (KPMG 2014). This scenario is as opposed to the US GAAP. Therefore, the definition of revenue and expense under IFRS does not include the gains and losses.
The competitive implications of the Sarbanes-Oxley Act (SOX) on US companies
The SOX of 2002 was ratified to lower fraud at the top level of corporate leadership, and to enhance financial reporting transparency. The additional rules for public companies made financial reporting expensive and complicated. Hence, the act was highly opposed. As a result, many international companies moved out of the US. However, the Act has successfully met its objectives so far. Therefore by reducing fraud and enhancing transparency in financial reporting, the act gives an advantage to US based companies as opposed to those located outside.
Conclusion
As the marketplace becomes globalized, adoption of one accounting standard with international acceptance is inevitable. Despite the multi-faceted differences between IFRS and GAAP highlighted above, the IFRS is better positioned to take up this role. Though the US has shown interests in adopting the IFRS, the GAAP is still widely used in the country. The IASB and FASB should therefore continuously make the two standards better, and work together towards ensuring their convergence.
References
KPMG. (2014). IFRS compared to US GAAP: An overview
PwC. (2014). IFRS and US GAAP: similarities and differences.
SEC. (2011). A W ork plan for consideration of incorporating IFRS into the financial reporting systems for U.S. Issuers: A comparison of GAAP and IFRS. The Office of Chief Accountant United States SEC
