Question

International Financial Reporting Standards are gaining support around the globe. In 2007, the SEC eliminated the requirement for foreign companies that issue stock in the United States to include in their financial statements a reconciliation of IFRS to U.S. GAAP. There also is a serious discussion of allowing U.S. companies to choose whether to prepare their financial statements according to U.S. GAAP or IFRS.

Many outside of the United States claim that a problem with U.S. GAAP is that there are too many rules. They argue for principles-based accounting standards in which the broad principles of accounting are emphasized and less emphasis is placed on detailed implementation rules. Americans counter that IFRS may lack quality and rigor. Additional rules are necessary to provide adequate guidance to users.

Requirements:

@Describe the two major reporting standards in the world.

@Research and name which countries use GAAP vs. IFRS.

@Explain the difference between principles and rules-based accounting standards.

@Explain the advantages of each approach.

Answer 1

1) Two major reporting stadards in the world are as follows:

a) International financial reporting standards issued by IFRS foundation & Internation accountings standard board.

b) US-GAAP acroynm for Generally Accepted accounting practices adopted by US SEC.

2) Countries using GAAP: - US

Countries using IFRS: - Australia, Brazil, Canada, European Union, Ghana, India, Japan, Montenegro, Nepal, Pakistan, Russia, Singapore, South africa, Taiwan, Turkey, Zimbawe.

C) US GAAP is rule based accounting standard wherein a detailed list of rules setup by the board must be followed at the time of preparing the financial statements.

Whereas principal based accounting standards (IFRS standards) are those which doesnt list down the strict rule to be followed but are principal based.The inherent characteristic of a principles-based framework is the potential of different interpretations for similar transactions. This situation implies second-guessing and creates uncertainty and requires extensive disclosures in the financial statements.

4) Advantages of

a) Principal based accounting

It has potantial of different interpation for similar transaction

Review of fact pattern is very thorough

b) Rule based accounting:

The research study is more focused on literature.