Question

Compare and contrast the development and use of GAAP and IFRS. Do you think the implementation of international accounting standards is feasible? Please explain.

Answer 1

Generally Accepted Accounting Principles (GAAP) refer to a combination of authoritative standards and a common set of accounting principles, standards and procedures that most companies use to compile their financial statements. “…is a summary of best practice in terms of the form and content of financial statements…” (Walker, 17). Companies are expected to use GAAP when reporting their financial data via financial statements. International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) that is becoming theglobal standard for the preparation of public company financial statements. The point of IFRS is to maintain stability and transparency throughout the financial world

IFRS requires financial statements to include a balance sheet, income statement, changes in equity, cash flow statement, and footnotes. The separation of current and noncurrent assets and liabilities is required, and deferred taxes must be shown as a separate line item on the balance sheet. Minority interests are included in equity as a separate line item.

Intangibles

In GAAP, acquired intangible assets (like R&D and advertising costs) are recognized at fair value, while in IFRS, they are only recognized if the asset will have a future economic benefit and has a measured reliability.

Accounting for Assets

US GAAP defines an asset as a future economic benefit, while under IFRS, an asset is a resource from which economic benefit is expected to flow.

Fixed Assets

Under US GAAP, fixed assets such as property, plant and equipment are valued using the cost model i.e., the historical value of the asset less any accumulated depreciation. IFRS allows another model - the revaluation model - which is based on fair value on the date of evaluation, less any subsequent accumulated depreciation and impairment losses.

GAAP	IFRS
Stands for	Generally Accepted Accounting Principles	International Financial Reporting Standards
Introduction	Standard guidelines and structure for typical financial accounting.	Universal financial reporting method that allows international businesses to understand each other and work together.
Used in	United States	Over 110 countries, including those in the European Union
Performance elements	Revenue or expenses, assets or liabilities, gains, losses, comprehensive income	Revenue or expenses, assets or liabilities
Required documents in financial statements	Balance sheet, income statement, statement of comprehensive income, changes in equity, cash flow statement, footnotes	Balance sheet, income statement, changes in equity, cash flow statement, footnotes
Inventory Estimates	Last-in, first-out; first-in, first-out; or weighted-average cost	First-in, first-out or weighted-average cost
Inventory Reversal	Prohibited	Permitted under certain criteria
Purpose of the framework	US GAAP (or FASB) framework has no provision that expressly requires management to consider the framework in the absence of a standard or interpretation for an issue.	Under IFRS, company management is expressly required to consider the framework if there is no standard or interpretation for an issue.
Objectives of financial statements	In general, broad focus to provide relevant info to a wide range of stakeholders. GAAP provides separate objectives for business and non-business entities.	In general, broad focus to provide relevant info to a wide range of stakeholders. IFRS provides the same set of objectives for business and non-business entities.
Underlying assumptions	The "going concern" assumption is not well-developed in the US GAAP framework.	IFRS gives prominence to underlying assumptions such as accrual and going concern.
Qualitative characteristics	Relevance, reliability, comparability and understandability. GAAP establishes a hierarchy of these characteristics. Relevance and reliability are primary qualities. Comparability is secondary. Understandability is treated as a user-specific quality.	Relevance, reliability, comparability and understandability. The IASB framework (IFRS) states that its decision cannot be based upon specific circumstances of individual users.
Definition of an asset	The US GAAP framework defines an asset as a future economic benefit.	The IFRS framework defines an asset as a resource from which future economic benefit will flow to the company.