Question

The United States may be accused of endorsing the idea that firms have several different books, or records, of a company to reflect the differences among GAAP reporting, tax accounting, managerial accounting, and IFRS.

A) Why does this phenomenon exist in the US; whereas, other countries may appear to have a single source of documents for financial and tax reporting?

B) Please highlight two, or more, areas of GAAP accounting where US GAAP and IFRS GAAP are not in agreement, and explain the impact on the financial statements.

Answer 1

GAAP means generally accepted accounting principles in the United States, these GAAP are the principles that are implemented and accepted in United States only.

As compared to GAAP, IFRS has more coverage and this is implemented and acceptable internationally. Hence this becomes difficult to trade internationally because of the differences in the GAAP and IFRS.

In United States this is common that there are different sources for the tax and financial reporting. This is because of the following facts that exists in the GAAP.

1.Accrual VS cash accounting

In USA accrual accounting is followed and in this case there exists a difference between the IRS and the books.

Suppose if we have received subscription amount of $12 for a year on 1 Oct then as per IRS this amount of $12 is fully taxable as this is a revenue that you have received but when it comes to the accrual accounting we have only recorded and recognized $ 3 as the revenue of the current year.

So this causes difference between the IRS and books.

2. Depreciation rates

When an asset is purchased this is depreciated and this depreciation reduces the profit of the company and hence the TAX.

As per GAAP an asset can be depreciated on the basis of the straight line method or written down value method, but this should be noted that the depreciation that is posted should be consistent throughout the life of the asset.

However if we check the Economic Growth and Tax Relief Reconciliation Act in 2001 and 2003, this allows the business to immediately write off the 100% or 50% of the qualified assets.

This proves that there is difference between what GAAP states and what the Tax states.

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US GAAP is for the USA and IFRS GAAP is for around 140 countries, hence there are many accounting areas where there are difference in the principles of both. Below are some of the areas where these both do not agrees.

1. Inventory accounting difference.

In USA companies are allowed to use LIFO method of accounting however as per IFRS this method is explicitly probhited and cannot be used.

If last in first out is used than this is possible that the inventory that is in books may not realize the value that is in the balance sheet as the value may be very old to realize.

In first in first out this is more significant that the value of inventory that is in books can be easily realized as the value of the inventory is more realistic and represents the fair market value of goods.

2. Expenses made on development

In USA expenses that are made on development are not allowed to capitalize and they are to be expensed off in the year they are incurred.

However in case of IFRS such expenses are allowed to be capitalized and are allowed to be depreciated.

In case of USA this will cause loss as development expenses are huge in nature and this will make the financial position worst but in case of IFRS this will increase the assets of the company as the expenses are allowed to be capitalized.

3.Liabilities recording

In case of USA, liabilities are classified in two parts that is current liabilities and non-current liabilities

Those liabilities that are to be paid in 12 months are classified in current and liabilities that are to be paid in more than 12 months are classified as noncurrent liabilities.

In case of IFRs no such classification is there. Ever liability is a liability and no classifications are made.