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Many publicly traded companies in the European Union were required to adopt International Financial Reporting Standards ("IFRS") by 2005. The International Financial Reporting Standards (IFRS) is the accounting standard employed in more than 110 states and has a number of major distinctions from the U.S. Generally Accepted Accounting Principles (GAAP). At the theoretical stage, IFRS is said to be more of a "principles based" bookkeeping standard in comparison to the U.S. GAAP which is said to be more "rules based."ÿ By being more "principles based", IFRS, debatably, characterizes and confines the financial sides of a business deal better than the U.S. GAAP.
International Financial Reporting Standards (IFRSs) are generated by International Accounting Standards Board (IASB), an international body whose headquarters are in London. The IFRSs are anticipated to reinstate nationalized standards of individual states, similar to, the USGAAP (US Generally Accepted Accounting Principles) in the USA. IFRSs are homogeneous international bookkeeping principles presenting advanced intelligibility and discovery requirements. The prevalent financial system US, nevertheless, is reluctant to move from its USGAAP to IFRS. Still, there are considerable differences and inconsistencies involving USGAAP and IFRS in these areas: Upward revaluation of permanent assets, LIFO/FIFO record assessment, management of unusual items, cash flow statements and others.
Compare and Contrast USA GAAP to IFRS
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1. Overview financial statements presentation
In IFRS relevant standards: Form and content is specified by IFRS, including IAS still extant and SIC/IFRIC Interpretations. Additional requirements may be specified by local statute, regulators or stock exchanges. While in the U.S GAAP, relevant standards: Form and content is specified by GAAP as set forth in GAAP hierarchy (AU Section 411) and SEC Regulation S-X.
In IFRS, Financial statements comprise: balance sheet, a statement showing either: the entire changes in equity, income statement; or adjustments in equity excluding those arising from investment or rather capital dealings with proprietors and distributions to these proprietors known as a Statement of Recognized Income and Expense (SORIE). There are no exemptions to cash flow statement, accounting guidelines and illustrative notes (IAS 1.8).
Conversely in the U.S GAAP, Financial statements comprise: income statement, statement of widespread income and balance sheet. This statement might be pooled with the income statement or the statement of changes in stockholders' equity (SFAS 130.22) statement of modifications in stockholders' equity. Alternatively, revelation of amendments in the detached accounts containing stockholders' equity other than retained earnings could be prepared in the notes to monetary statements (APB 12.10). Statements of cash flows have limited exemptions and notes to financial statements. Generally, in the IFRS comparative financial information is required "except where a Standard or interpretation requires otherwise" (IAS 1.36) while in the U.S GAAP, No specific requirement to provide comparative statements but desirable to do so (ARB 43, Ch2A, par. 2). SEC rules require balance sheets for the two most recent fiscal years and three year statements of income and cash flows (SEC Regulation S-X; Rules 3-01a and 3-02a). (Thornton, 2001, pp.3)
2. Balance sheet
In the IFRS Relevant standard: IAS 1 while in the U.S GAAP, Relevant standards: ARB 43; SFAS 6 and 109; SEC Regulation S-X (Rule 5-02). The IAS 1 specifies items that must be presented on the face of the balance sheet, and lists additional information that must be either on the face or in the notes (IAS 1.68-.77). U.S. GAAP does not prescribe a standard format. SEC Regulation S-X (Rule 5-02) does require specific line items to appear on the face of the balance sheet, where applicable. IAS 1 requires current and non-current items to be presented as separate classifications on the face of the balance sheet (except where a presentation based on liquidity is reliable and more relevant) (IAS 1.51) while in the U.S GAAP, The balance sheets of most enterprises show separate classifications of current assets and liabilities.(pp.4-5)
However, an unclassified balance sheet is commonplace for enterprises in specialized industries for which the distinction is deemed to have little or no relevance (SFAS 6.7). Moreover, In the IFRS Deferred and current tax liabilities and assets must be shown as separate line items on the face of the balance sheet. Deferred tax assets (liabilities) may not be classified as current assets (liabilities) (IAS 1.70) while in the U.S. GAAP, Deferred tax assets and liabilities are separated into current and non-current amounts and the net current deferred tax asset or liability and the net non-current deferred tax asset or liability, if any, is shown on the face of the balance sheet (SFAS 109.41-.42).
3. Profit and loss account/income statement
In the IFRS Relevant standards: IAS 1, IFRS 5 while in the U.S. GAAP, Relevant standards: SEC Regulation S-X (Rule 5-03); APB 30; and SFAS 144. In the IFRS, Two main expense categorizations are nature of expenses and function of expenses. IAS 1 does not specify exact formats but does specify items that must be on the appearance of the returns statement and additional information that must be either on the appearance of the revenue statement or else in the annotations (IAS 1.78-.95). U.S. GAAP does not prescribe a standard format; single-step format or multiple steps formats acceptable. SEC Regulation S-X (Rule 5-03) does require specific line items to appear on the face of the income statement, where applicable. (Thornton, 2007, pp.8-10)
In the IFRS, where items of income and expense are material, disclose the amount and nature of those items either on the appearance of the revenue statement or in the annotations (IAS 1.86). Additional line items, headings and subtotals are presented where relevant to an understanding of performance (IAS 1.69). In the U.S. GAAP, a material occurrence or operation that is bizarre in character or transpires infrequently but not mutually must be accounted for as a detached constituent of revenue from ongoing procedures (APB 30.26).
4 .Statement of changes in equity/SORIE/Reporting Comprehensive Income
In the IFRS, Relevant standard: IAS 1.96-.101while in the U.S. GAAP, Relevant standards: ARB 43 Ch. 2A; SFAS 130; APB 12. In the IFRS, Present either: a statement of recognized income and expense (SORIE) as a primary statement, and present capital movements and distributions in the annotations, or a declaration of amendments in equity, which combines recognized income and expenses with capital movements and distributions in a statement of changes in equity. Certain items must be split between minority interest and parent. The effects on prior year adjustments must be expressed in respect of each component. The SORIE approach must be used if the IAS 19 approach of recognizing actuarial gains and losses outside of profit or loss is taken (IAS 19.93C) (see Section 6.2.).
On the other hand, in the U.S. GAAP, Comprehensive income and its components should be presented in a monetary statement that is demonstrated with equivalent importance as the other fiscal statements that comprise a complete pack of fiscal statements.
A specific format is not required but net income must be shown as a constituent of inclusive returns in the monetary statement that shows the comprehensive income information. Comprehensive income may be displayed 1) as part of the income statement, 2) on a stand-alone basis, or 3) as a component of the declaration of adjustments in the stockholders' equity (SFAS 130.22-.23). (pp.15-20)
Revelation of adjustments in the split accounts consisting of stockholders' equity besides to retained earnings is mandatory. These disclosures may be prepared in the annotations to the monetary statements or through a different financial statement (APB 12.10). Income attributable to minority interests is generally presented in consolidated profit and loss account as a deduction against after-tax profits.
5. Cash flow statement
In the IFRS, Relevant standard: IAS 7 while in the U.S. GAAP, Relevant standards: SFAS 95,102, and 104. In the IFRS, there are no exemptions while in the U.S. GAAP, there are exemption for: Defined benefit pension plans and certain other employee benefit plans and highly liquid investment companies that meet specified criteria (SFAS 102.10). In both the IFRS and the U.S. GAAP, Standard categories are: Operating, investing and financing whereby, Interest and dividends are classified consistently from year to year under the most appropriate heading. Interest and dividends paid may be shown as operating or financing cash flows. Interest and dividends received may be shown as operating or investing cash flows. However in IFRS, banks must show interest received and paid as operating cash flows(IAS 7.31-.34) and taxation cash flows are disclosed separately under 'operating' unless they can be identified specifically with investing or financing cash flows (IAS 7.14(f) and IAS 7.35-.36).Conversely, in the U.S. GAAP, taxation cash flows are classified as operating activities.
The attempt to synchronize and converge international bookkeeping principles has been around for more than 40 years. More essentially the IFRS is a regular support pack of principles, while the Korean GAAP is regulation based. This implies that better ruling will be needed when executive applies the IFRS than has been required in the past. This transformation in philosophy presents the maximum continuing challenges to the Korean accounting career. Some of the main regions of methodological bookkeeping disparity involving the IFRS and the GAAP comprise the consolidation and commerce amalgamation principles, monetary instruments, worker benefits and foreign legal tender bookkeeping.
According to Jha, the Financial Accounting Standards Board ("FASB") and the International Accounting Standards Board ("IASB") gave a memorandum of understanding, in September 2002, known as the "Norwalk Agreement" in which they "accredited their commitment to high-quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting." The memo annotations that the Boards have "pledged to use their best efforts (a) to make their existing financial reporting standards fully compatible as soon as is practicable and (b) to coordinate their future work programs to ensure that once achieved, compatibility is maintained."