IFRS Vs U.S GAAP on classifications of cashflows

IFRS vs U.S GAAP 

Accounting standards have evolved over the years with traditional principles of accounting being replaced by modern and easier to work with principles and standards. This has been necessitated by the changing business environment and the fact that technology has made business across easier. The U.S GAAP standards were applicable in the United States making it difficult to have a uniform system of accounting for businesses operating both in the United States and in other States. The U.S GAAP system is also based on set standards of rules that make it less applicable in other areas of the world. IFRS hence acts as better accounting standard that U.S GAAP since it brings along simpler and more practical accounting methods. As such, the standardization of accounting standards and the replacement of U.S GAAP with IFRS creates a standard working principle for all accounting purposes. IFRS provides better accounting guidelines that help businesses make better decisions because the standards are conventional and the standards are easier to understand. 

IAS (18) and IFRS on Recognition of Revenue 

Companies their revenue from different operating activities such as sale of goods and services, royalties, interest and dividends. IAS (18) is a standard applied by IFRS to help recognize and measure revenue. IAS (18) stipulates that revenue is recognized when all conditions stipulated by the IAS (18) are met and is included in the income statement. Revenue is also measured at fair value of receivables. Difference in revenue is considered where a transaction is done at a value less or more than the fair value. IFRS gives a 5-step model to help in measuring and recognizing revenue while IAS (18) gives a different criterion for each revenue type. Examples of transactions that illustrate the difference between the two standards are:

A company has a won a tender worth $100,000 but the tender will be completed in 2 years. To date, the company has incurred $14,000 on the contract. Under IAS (18) the company will only recognize the $14,000 as revenue since the contract isn’t complete. Under IFRS, revenue will be recognized when the company fulfills its part of the contract which after the completion of the project. 

A company offering annual rates to customers such as Internet services will recognize its revenue when it is earned as opposed to when it is received under IAS (18). Revenue is recognized by the number of subscriptions running that month even if the clients will pay at the end of the period stipulated in the contract. IFRS recognizes such revenue when obligation of supplying the service is complete at the end of the period. 

Under IAS (18), revenue from a sale of goods or services between a company and a client is recognized even when ownership of the item has not been fully transferred to the customer, as far an agreement or a contract is made. IFRS on the other hand recognizes revenue when ownership and risk if transferred to the customer. 

IFRS Vs U.S GAAP on classifications of cashflows 

The classification of cashflows for the two standards is different in that the IFRS classifies cash flows for a company less strictly than U.S GAAP. Such differences have an impact on the operations of the company, especially on the company's liquidity. One of the main differences between the two is that dividends paid or received and interests received and paid are categorized as Financing or operating activities under IFRS (Alibhai, 2019). On the other hand, Interest paid is strictly classified as an operating activity and dividends paid are classified as financing activity under U.S GAAP. Taxes paid are categorized as operating activities under IFRS. The standard also stipulates that a proportion of taxes paid can be assigned to financing or operating activities as long as it can be attached to a related expense. THE U.S GAAP classifies taxes paid strictly as operating activities. Bank overdrafts are categorized as financing activities under U.S GAAP while the same is classified as a “cash and cash equivalent element” under IFRS. 

Impact of cashflow classifications (IFRS vs U.S GAAP) on U.S Companies 

The adoption of new standards will impact companies in the United States in various ways. Corporate management for almost all companies will benefit from standardized accounting rules and practices that are applicable all over the world. At the same time, companies now have an opportunity to obtain capital via interest rates while reducing business risk and the cost of operation. Investors in different companies will benefit from standards that are easier to understand enabling them to make investment decisions for different companies without having to convert standards to suit a specific country of interest (Ben, Lévy & Ammi, 2018). Such knowledge is expected to lead to a rising inflow of international capital. 

The new standards are expected to lead to a decrease in costs associated with entering the foreign exchange. When all companies follow the same rules and regulations, different markets can compete for investment opportunities internationally. The implication is that investors now have access to different markets, giving companies listed in stock exchange markets leverage when it comes to selling their shares as well as investing in other companies. Companies are also likely to benefit from increased cash flows and international investments which in turn leads to reduced interest rates and as such economic growth for the company and the country in which it operates. 

Differences between US GAAP and IFRS on the classification of contingent Liabilities 

Contingent liabilities are divided into categories depending on their likelihood of occurrence. A contingent liability is a liability that has not yet occurred but is likely to. Liabilities are classified according to stipulated bright-line tests in the US GAAP standards. Liabilities with high chances of occurrence are classified under "probable" while those with a medium chance of occurrence are classified under reasonably "possible". The other difference between the two standards on the classification of liabilities as on the scope ( Shamrock, 2015) . US GAAP is only applicable to asset impairment, while IFRS does not apply to impairment of assets.

The US. GAAP requires that where the fair value can be determined then acquired assets and liabilities be recognized at fair value. If the fair value can not be determined, companies should value the contingent assets and liabilities using an existing guideline. Once measured, the acquiree of the liability or asset is expected to develop a rational basis or method of measuring the liability or asset depending on their nature. IFRS requires that an acquiree's contingent liability be measured separately on the acquisition using the liabilities fair value in cases where it can be determined reliably ( Shamrock, 2015) . Subsequently, the liability is measured at a value higher than the amount initially acquired at less any cumulative amortization or using the best estimate of the amount required to settle the liability.

Differences between Risks, Best estimates and Uncertainties – IFRS vs U.S GAAP 

Best Estimate 

IFRS requires that the "best estimate" of a cash and cash equivalent element be used in reporting. At the same time, U.S GAAP stipulates that if another amount gives a better estimate as compared to another amount, then the amount should be accrued ( Collier, 2017) . IFRS looks at "best estimate" as the expected value under a set of specific outcomes. U.S GAAP, on the other hand, requires that the minimum amount is accrued if it's a better estimate than any other amount. U.S GAAP requires a discussion of estimates in cases where the estimate can change materially in the near future.

Risks and Uncertainties 

In accounting, risks and uncertainties influence decision making. U.S GAAP requires that companies disclose risks and uncertainties for different transactions which are not a requirement in IFRS ( Collier, 2017). U.S GAAP stipulates disclosure for any vulnerabilities resulting from specific concentrations such as the supply of resources. Where a concentration exists during a financial transaction, then the company is exposed to possible risky events.

In conclusion, the integration of IFRS into the accounting systems in the United States ensures that users of accounting information better understand the set standards. IFRS standards are simpler and straightforward as compared to the U.S GAAP standards that have been in use in the United States for years. Companies in the United States stand to benefit immensely from the IFRS. One such advantage is the fact that investors find it easier to invest in different countries across the world. At the same time, better accounting standards make it easier for business managers to understand the accounting bit of the business and hence make sound decisions to benefit the business.

References 

Alibhai, S. (2019).  Wiley 2019 interpretation and application of IFRS standards . 

Ben Bouheni, F., Lévy, A., & Ammi, C. (2018).  Financial Management: USGAAP and IFRS Standards . John Wiley & Sons Incorporated. 

Collier, D. (2017).  Accounting for managers - interpreting accounting information for decision- making 4e . John Wiley & Sons Ltd. 

Shamrock, S. (2015).  IFRS and US GAAP . John Wiley & Sons.