Question

In: Accounting

IFRS has strict rules that if a liability is a current liability at the end of...

IFRS has strict rules that if a liability is a current liability at the end of the accounting period then it is a current liability on the balance sheet. GAAP gives more leeway in that if a company has the ability and the positive intent to refinance a current liability then it can list it as a long term liability. Discuss the pros and cons of each approach. Choose the method you think is preferable and justify your choice.

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Expert Solution

In simple terms, all the liabilities under IFRS are to be treated as the current liabilities and it does not provide further classification in details such as current and non-current and long-term.

However, In case of GAAP the in detail classification of the disclosure can be made and like current and non-current bifurcations. This practice is allowed as per GAAP.

The pros and cons of each approach are as follows:

  • The basic difference is that in the present situations the whole world is a market for all the companies and having establishments and branches all over the world and the IFRS is a most used for standard accounting, whereas GAAP is only US-based when a US-based organization doing having international establishments its make the work more complicated as we need to perform under both GAAP and IFRS
  • The advantage of the depreciation on the expenses incurred in the nature of development, IFRS allow the depreciation to be capitalized whereas GAAP does not allow the same.
  • The valuation of fixed assets, under IFRS those are to be fair market valued less accumulated depreciation and in case of GAAP those are historically valued at cost less accumulated depreciation, hence the calculations of fair market value holds good in this case as it provides the present market situation and the true value of assets of a company
  • The classification of liabilities as said above IFRS treat all liabilities as current liabilities and GAAP provides a classification which makes a more appropriate disclosure, which helps to know the working capital needed by an organization in order to meet its daily needs.
  • The future economic benefits from a research and developments costs are calculated in detail and used in valuation for such intangible assets however under GAAP those are to be recognized at the fair market value.

Hence from the above discussion, IFRS had more advantage and fair presentation in major circumstances over GAAP, in few circumstances the GAAP is more useful than IFRS.


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