Question

The United States was one of the leaders in pushing for development of international accounting standards. Yet, despite the fact that so many U.S. corporations have offices worldwide, the United States has been reluctant to forgo GAAP; the text suggests there are still issues that need to be resolved. Are the issues the result of financial or cultural differences between the United States and other countries?

Answer 1

The Generally Accepted Accounting Principles in the US (US GAAP) refer to the accounting rules used in United States to organize, present, and report financial statements for an assortment of entities which include privately held and publicly traded companies, non-profit organizations, and governments. The term is confined to the US and is, therefore, generally abbreviated as US GAAP. But theoretically, the term "GAAP" covers the entire accounting industry, rather than only the US.

• The provided info should be apt to be presented to creditors and potential investors in addition to other users for making cogent decisions concerning investment, credit and similar financial activities.
• The provided info should be helpful to the creditors and potential investors in evaluating the amounts, timing, and uncertainty of expected cash receipts.
• The info should be related to economic resources, the claims to those resources, as well as the changes occurring in them.
• The provided info should be helpful in making financial and long-term decisions.
• The information should be helpful in perking up the business performance.
• The information should be helpful in maintaining records

The US GAAP features four basic assumptions to meet its objectives. These are:

• Accounting Entity

This assumes the business to be a separate entity from its owners as well as other businesses. Moreover, it also stresses on keeping revenue and expense separate from personal expenses.

• Going Concern

This assumption presumes that the business will be indefinitely in operation. This assumption authenticates the methods of amortization, depreciation, and asset capitalization. However, this assumption is not applicable in the event of liquidation.

• Monetary Unit Principle

This assumption presumes an unwavering currency to continue to be the unit of record.

Time-period Principle

This assumption states that a business enterprise’s economic activities can be divided into simulated time periods.While preparing financial statements through the use of GAAP, a large number of American corporations and other business enterprises follow the rules of how to report different business transactions based on the assorted GAAP rules.

International Financial Reporting Standards (IFRS) set common rules so that financial statements can be consistent, transparent and comparable around the world. IFRS are issued by the International Accounting Standards Board (IASB). They specify how companies must maintain and report their accounts, defining types of transactions and other events with financial impact. IFRS were established to create a common accounting language, so that businesses and their financial statements can be consistent and reliable from company to company and country to country.

IFRS are designed to bring consistency to accounting language, practices and statements, and to help businesses and investors make educated financial analyses and decisions. The IFRS Foundation sets the standards to “bring transparency, accountability and efficiency to financial markets around the world… fostering trust, growth and long-term financial stability in the global economy.” Companies benefit from the IFRS because investors are more likely to put money into a company if the company's business practices are transparent.

The U.S. Securities and Exchange Commission (SEC) has said it won't switch to International Financial Reporting Standards, but will continue reviewing a proposal to allow IFRS information to supplement U.S. financial filings. GAAP has been called "the gold standard" of accounting. However, some argue that global adoption of IFRS would save money on duplicative accounting work, and the costs of analyzing and comparing companies internationally.

IFRS are sometimes confused with International Accounting Standards (IAS), which are the older standards that IFRS replaced. IAS was issued from 1973 to 2000, and the International Accounting Standards Board (IASB) replaced the International Accounting Standards Committee (IASC) in 2001.

FRS covers a wide range of accounting activities. There are certain aspects of business practice for which IFRS set mandatory rules.

• Statement of Financial Position: This is also known as a balance sheet. IFRS influences the ways in which the components of a balance sheet are reported.
• Statement of Comprehensive Income: This can take the form of one statement, or it can be separated into a profit and loss statement and a statement of other income, including property and equipment.
• Statement of Changes in Equity: Also known as a statement of retained earnings, this documents the company's change in earnings or profit for the given financial period.
• Statement of Cash Flow: This report summarizes the company's financial transactions in the given period, separating cash flow into Operations, Investing, and Financing.

In addition to these basic reports, a company must also give a summary of its accounting policies. The full report is often seen side by side with the previous report, to show the changes in profit and loss. A parent company must create separate account reports for each of its subsidiary companies.

IFRS vs. American Standards

Differences exist between IFRS and other countries' Generally Accepted Accounting Principles (GAAP) that affect the way a financial ratio is calculated. For example, IFRS is not as strict on defining revenue and allow companies to report revenue sooner, so consequently, a balance sheet under this system might show a higher stream of revenue than GAAP's. IFRS also has different requirements for expenses; for example, if a company is spending money on development or an investment for the future, it doesn't necessarily have to be reported as an expense (it can be capitalized).

Another difference between IFRS and GAAP is the specification of the way inventory is accounted for. There are two ways to keep track of this, first in first out (FIFO) and last in first out (LIFO). FIFO means that the most recent inventory is left unsold until older inventory is sold; LIFO means that the most recent inventory is the first to be sold. IFRS prohibits LIFO, while American standards and others allow participants to freely use either.

KEY TAKEAWAYS

• IFRS were established to create a common accounting language, so business and accounts can be understood from company to company and country to country.
• Both companies and investors benefit from IFRS because people are more confident investing in a company if its business practices are transparent and reliable.
• The IFRS are set by the International Accounting Standards Board, an independent body of the IFRS Foundation, which provide updates, insights and guidance on the standards.