For many businesses around the world, especially, those that are in the field of accounting, one of the major issues that have risen in the recent years related to the difference between the International Financial Reporting Standards of IFRS and the United States Generally Accepted Accounting Principles of the US GAAP. Currently, much countries around the world have adopted the IFRS, however, the US still applies the GAAP. Either way, the two aim at making sure that financial information of companies is presented in ways that can be understood by third parties, and which are free from inconsistencies and bias. It is also vital to note that even though they have a common objective, they are often different in terms of the way they present items in the financial statements. The commonest and most obvious difference is seen in the balance sheet, more specifically, in the way in which the assets, shareholder’s equity, and liability sections are presented. There are also differences in the way items are defined such as materiality.
How materiality is defined by FASB and IASB
The Security and Exchange Commission or the SEC of the United Stated developed the FASB that currently has the obligation of developing and maintaining the U.S GAAP rules in the country. On the other hand, the IFRS are guidelines for the international accounting standards and are often managed by the IASB. Both the FASB and the IASB have guidelines which are overlapping, but there are still differences in many areas of accounting.One difference is seen in defining materiality. The materiality concept is a principle that indicates that all matters that are considered to be trivial need to be disregarded and all those that are seen to be important should be disclosed (FABS, 2017) . It means that all the items that are big enough to matter are considered to be material items. The FASB through the US GAAP state that items in the financial statements are material is they are able to influence the economic decisions of those who are depending on them. It means that errors that are material can mislead decision makers. It is vital to note that in this case, the materiality of a financial statement only has to mean with reference to its intended audience and the purpose of the statement to the audience.
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According to the IFRS which was developed by the IASB something is considered to be material if it influences the decisions that are made by an individual. In other words, it includes the influence that the information has in the decision-making process is it is included or excluded from the statements of financial information. To be more precise, the IFRS defined materiality as the misstatements or omissions of items that are considered to be material if they can, individually or at a collective level, have an influence on the economic decisions that are made by the users based on the financial statements. In this case, materiality is dependant on the nature and size of misstatement or omission that is judged in the surrounding circumstances (IASPlus, 2017) . It means that the nature and size of an item or a combination of the two factors can be a determining factor. In other words, information is considered to be material if misstating or omitting it can influence the kind of decisions that are made by users based on the financial information. The concept of materiality is vital because it acts as a form of filter that helps the management team make sure the financial statements only includes information that is material.
The examples provided by the concept statements
Materiality is usually defined in the conceptual framework to relate to the qualitative characteristics that are linked to reliability and relevance. In other words, it is things that influence the decision makers so that they can determine if specific information can be kept from the investors and if the amount that is in question is small enough not to make any difference. It can also be able to influence the decision makers so that they can disclose the information if they are able to determine that the amount in question is significant enough to make a difference to the board. The concept statements also provide some examples where specific quantitative materiality guidelines are provided to companies. Two examples of the materiality guidelines include if the earnings per share are diluted in a company by not less than three percent and also in cases where a customer in a company generates over ten percent of the overall revenues in a segment then it should be considered to be material. Materiality concept should be quantified so that companies are able to get clear guidelines on the limits above which they need to consider an item to be material.
The concept of articulation between financial statement elements
Articulation can be described as the relationship that exists between liabilities, equity, and assets, and the way in which there are interrelated on various financial reports. A good example is seen in the balance sheet and the income statement which is mathematically defined in a way that the change in the shareholders’ equity for the period is equal to the net income. It is assumed that there are no previous period adjustments or capital transactions. It means that the reports depend on each other and thus changes that are made on transactions in one report affect the other. The back and forth information flow that is seen between the Balance Sheet and the Income Statement is what is known as articulation.
Conclusion
There have been issues that relate to the difference between the International Financial Reporting Standards of IFRS and the United States Generally Accepted Accounting Principles of the US GAAP. One difference is seen in defining materiality. The FASB through the US GAAP state that items in the financial statements are material is they are able to influence the economic decisions of those who are depending on them. It means that errors that are material can mislead decision makers. While according to the IFRS defined materiality as the misstatements or omissions of items that are considered to be material if they can, individually or at a collective level, have an influence on the economic decisions that are made by the users based on the financial statements.
References
FABS. (2017, 08 16). Conceptual Framework for Financial Reporting . Retrieved from FABS: http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176166402450&acceptedDisclaimer=true
IASPlus. (2017, 08 16). IASB publishes proposed Practice Statement on materiality . Retrieved from IASPlus: https://www.iasplus.com/en/news/2015/10/materiality
