There are two primary accounting systems in the world. These are the International Generally Accepted Accounting Principles (iGAAP) and the United States Generally Accepted Accounting Principles (U.S. GAAP). While the US GAAP provides the main guiding principles for the United States (U.S), the iGAAP principles are used by countries globally (PwC, 2014; Guan et al., 2006; S.A.Z, 1998). The two systems possess both similarities and differences in procedures, language, and reporting. As a result, a consistent debate on which system is more suitable than the other for accounting purposes exists. This essay will, therefore, explore the differences and similarities between U.S GAAP and iGAAP. However, emphasis will be placed on their approach to balance sheet reporting.
A balance sheet sets out the ending balances of a company's asset, liability, and equity accounts as of the date specified in the company’s report. In both the iGAAP and U.S GAAP, a balance sheet is a necessary document in financial reporting. Regarding offsetting of assets and liabilities, the two systems agree that the offsetting of liabilities and assets is inappropriate except in the presence of a ‘right of setoff’ (PwC, 2014; Niu & Richardson. 2004). This is a legal right that is enjoyed by a debtor either by contract or not and allows him or her to discharge a portion or all the debt owed to another party. This is done by applying an amount that the second party owes him or her against the debt. However, under the U.S GAAP, four conditions are required to enjoy the right to set-off (PwC, 2014). First, the two parties must owe each other an amount that is determinable. Secondly, the reporting part must have the right to set off. Thirdly, the party that reports should have intentions of setting off, and lastly, the right to set off has to be enforceable by law. Conversely, under iGAAP, for an entity to offset a financial liability and a financial asset, he or she requires two conditions. First, a legally enforceable right to set off and second must have intentions of settling on a net basis or realizing the asset and paying the liability concurrently.
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Differences and similarities also exist with regard to the disclosures for offsetting liabilities and assets (PwC, 2014; S.A.Z., 1998). In U.S GAAP these are limited to repurchase agreements, securities lending transactions and derivatives to the extent that they are subject to a master setting arrangement that is enforceable any other similar arrangement (PwC, 2014). Likewise, the disclosures are limited to offsets in the financial statements. Under iGAAP, however, the requirements for disclosure are applicable for all recognizable financial instruments set off in the financial statements. Secondly, they apply to all recognizable financial instruments that are subject to a master netting arrangement that is enforceable, or a similar bargain, whether they are set off in the financial statements or not. Differences are also noted as regards debt classification. Under iGAAP, this classification does not consider the financing arrangements that take place post-balance sheet. Therefore, more debt is considered current . This is as opposed to the U.S GAAP. On the other hand, except for particular industries, a classified balance sheet is necessary under iGAAP. In this regard, the exception under U.S GAAP applies when the presentation of liquidity is more relevant and reliable. Refinancing counterparty is the other aspect of balance sheet reporting that exhibits a difference under the two systems. In this case, as opposed to U.S GAAP, the differences that exist in the accounting guidance for specific refinancing arrangements may necessitate more debt to be classified as being current (PwC, 2014).
In conclusion, fundamental similarities and differences exist between the two systems. These are with regard to the importance of the balance sheet, offsetting of assets and liabilities, the disclosures for the offsetting, debt classification, and lastly, refinancing arrangements. Despite this, the importance of U.S GAAP and iGAAP accounting systems in balance sheet reporting in the U.S and world respectively cannot be overstated.
References
Guan, Y., Hopeb, O., & Kang, T. (2006). Does Similarity of Local GAAP to US GAAP Explain Analysts' Forecast Accuracy? Journal of Contemporary Accounting & Economics, 2 (2), 151-169.
Niu, F. & Richardson, G. (2004). Earnings Quality, Off-Balance Sheet Risk, and the Financial-Components Approach to Accounting for Transfers of Financial Assets. SSRN Electronic Journal .
PwC. (2014). IFRS and US GAAP: similarities and differences. Retrieved from https://www.pwc.ch/en/publications/2016/ifrs_and_us_gaap_similarities_and_differences.pdf
S.A.Z., (1998). International accounting—Similarities & differences—IAS, US GAAP and UK GAAP. The International Journal of Accounting, 33 (3), 402.
