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Key Topics
Requirement
Comparing IFRS to GAAP- Managerial Accounting
Solution
Introduction
In this present paper, we will discuss the comparison between IFRS and GAAP. The comparison has been made on the basis of the format of a statement, conceptual framework commonly used the term of IFRS are synonyms with common stock and balance sheet, considering issues of SEC, rules of revenue recognition, and competitive implications of SOX.
The international business increases those with the financial responsibilities that should be well versed in the two main methods of accounting, namely, GAAP and IFRS. The GAAP is set by the financial accounting standard board which is mainly used in the United States, and the IFRS is used in many countries. Both the methods have shared some similarities, and some differences are also there which results in the different styles of reporting. A high understanding of both methods is necessary to take an effective decision.
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Difference in format
According to the GAAP, the accounted are listed on the basis of liquidity due to which the cash is reported firstly as a current asset whereas the shareholder's equity is listed in the last. On the other hand, the IFRS method does not require the list of accounts on the basis of any criteria due to which majority of the company's reports in reverse order of liquidity (Sedki et al., 2014). The bottom line is to offer a clear understanding of assets to the users of the financial statement.
The objective of financial reporting
The conceptual framework of GAAP and IFRS are the same in terms of the objective in financial reporting because both are giving similar value and financial reporting frequency. The financial reporting should comply with the standards and norms of the industry which are agreed by both the methods. Both are providing useful information to the users, but GAAP provides information to the investors and decision making related to credit whereas IFRS provides the information related to the changes and financial performance of the company to the various users which helps to take economic decisions of the company. The GAAP is focusing on maintaining the standards with the businesses of the United States whereas IFRS is focusing on maintaining the standard with various countries (Krishnan et al., 2012).
A common term used under IFRS are synonyms with common stock & balance sheet
The opposed term of common stock which is used by the IFRS is "Shared Capital Ordinary". The common stock is defined as the value of equity which is acquired in return for cash. The shared capital ordinary is mainly used in Europe, so it is selected by the IFRS as the common term (Smith et al., 2012). The opposed of a balance sheet is "Statement of financial position" which is used by the IFRS. It is used by the IFRS because the purpose of the statement is to determine the financial position of the company. Whereas the formats of the balance sheet and statement of financial position have a different format in which both compare asset to equity and liability.
Issues considered by SEC
If the IFRS accounting method is considered by the United States, then the companies in the United States will be highly impacted because they are familiar with the GAAP reporting standard. The training is required for the boards and management of the company in order to meet the expertise level which is set by NASDAQ, AMEX, and NYSE. The training is also required for auditors and accounting departments for making the reports in IFRS standard. Internal control also required to be modified in order to support the implementation of the IFRS standards. The new commitments will be implemented by the company such as dividends, dents, compensation on the basis of performance.
Comparison of rules
GAAP has industry-specific requirements in order to meet the event for revenue recognition of the company. Under GAAP the revenue recognition can be done on accrual and cash basis. The revenue became significant and recognized then accrual basis is used, and cash basis accounting is done when the payment is received. The GAAP has more requirements than the IFRS, but the same rules are followed by the IFRS as well (Malone et al., 2016). The revenue can be recognized when there is a high possibility of economic benefit, and it can be measured in the future accurately.
Gain and loss under IFRS
The revenue is defined as the gross inflow of economic benefits which is raised from the ordinary operating activities and it excludes non-operating gains. The gains and losses are excluded from the part of revenue, and they are considered in the operating activities.
Competitive implications of SOX
The Sarbanes-Oxley Act, 2002 was established to prevent and detect fraud. The cost of the internal cost is also very expensive. According to (Weygandt et al., 2013), the cost of SOX compliance for a single study for the United States companies is approximately $35 Billion with the doubling of audit fee in the first year of compliance. It causes huge financial strain for the small companies who are having low revenue.
If the United States adopts the implementation of IFRS, then they must consider the revenue and size of the company in the context of the cost of internal control reviews. The standard must be complying with every company without sacrificing the funding of the actual business. The adoption of similar accounting standard is more efficient which helps to protect the fraud and discrepancies in order to achieve the regulation and necessary compliances (Cefaratti et al., 2014).
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It can be concluded that both are having different formats and reporting style. The objective of financial reporting is similar in both standards. The term Share Capital Ordinary is used for common stock and Statement of financial position for balance sheet under IFRS. The implementation of IFRS in the United States is difficult which requires training in order to meet the expertise criteria set by NASDAQ, AMEX, and NYSE.
References
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Sedki, S. S., Smith, A., & Strickland, A. (2014). Differences and Similarities Between IFRS and GAAP on Inventory, Revenue Recognition, and Consolidated Financial Statements. Journal of Accounting and Finance, 14(2), 120.
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Krishnan, S. (2012). Inventory Valuation under IFRS and GAAP. Strategic Finance, 93(9), 51.
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Smith, L. M. (2012). IFRS and US GAAP: Some key differences accountants should know. Management Accounting Quarterly, 14(1), 19.
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Malone, L., Tarca, A., & Wee, M. (2016). IFRS not?GAAP earnings disclosures and fair value measurement. Accounting & Finance, 56(1), 59-97.
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Cefaratti, M., Dorminey, J. W., Lin, H., & Reed, T. (2014). Litigation Risk and Management Reporting Choice: A Comparative Study of PSLRA and SOX. Managing Reality: Accountability and the Miasma of Private and Public Domains (Advances in Public Interest Accounting, Volume 16) Emerald Group Publishing Limited, 16, 65-89.
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