IFRS and GAAP Accounting Principles Essay

IFRS is also referred to as International Financial Reporting Standards. They are set of standards of accounting developed by International Accounting Standards Board (IASA). They are becoming the standards in the globe to be used for preparation of financial statements for the public companies. IASB is independent body which sets accounting standards which is based in London (McLaughlin, 2009). This body consists of fifteen members who are from nine countries including United States. IASB started operating in 2001 since it succeeded International Accounting Standards Committee. With desperate laws, cultures, tax regulation and commerce, individual nations, overtime have come so as to develop accounting systems of their own. In United States, Financial Accounting Standard Board (FASB), formed in year 1973, was third group which developed the Generally Accepted Accounting Principles (GAAP) in U. S, since the formal setting of standards which started in 1939. FASB is the first group in US which employed independently funded full-time professionals to be independent in accounting profession. Sanctioned officially in 1973 December, by Securities and Exchange Commission (SEC), which was federal regulator, FASB up to now continues setting accounting standards for U. S (Subramani, 2009). IASC was formed shortly after FASB had been formed in the same year so as to develop accounting standards which will be internationally accepted. During the early 1970s, economy of the globe was at that time marked by expansion of the cross-border activities. This time seemed to be right in considering whether there was a need to set universal accounting standards to address world which was shrinking (McLaughlin, 2009). IASC in their effort of promoting acceptance of one set standards of accounting globally, tried to write certain inclusive standards. Committee members often had difficult in achieving a common consensus on proper accounting treatment to transactions which were similar or the same (AICPA, 2010). They identified preferred treatments, but accounting which was different with also different results was as well allowed. They considered this as necessary so as to promote the acceptance of complete set for the world accounting standards. If specific standard was much different from that which was accepted generally in an individual country, that nation may not accept all the set standards. It was better in allowing some alternatives in order to bring many nations into the mix. International Accounting Standards Board (IASB) replaced IASC after it had issued 41accounting standards to be used internationally in 2001. Since formation of IASB, it has issued around eight IFRS and also they have modified several international accounting standards (IASs). In 2000, European Commission provided the international standards large boost as it announced initiative which required every listed company in the European union to be using IFRS starting the year 2005. Before mandatory introduction for all companies to use IFRS, all countries in European Community regulated separately their standards of reporting (McLaughlin, 2009). The measure of using IFRS did not affect the non-listed companies in Europe. European ministers’ council approved IFRS in 2002. At the start of 2005; approximate of 7000 companies effected the change. Around 6500 of these companies had been prior reporting GAAP in their own country, with almost 3000 of them in UK alone (Ernst & Young, 2009). EU however, never endorsed three paragraphs in IAS 39, and these were standards which deal with measurements and recognition of the financial instruments. Volatility potential of the earnings which was related to such paragraphs’ accounting macro hedge as well as option of fair value made the standard setters to go back in the drawing board several times, but there was no appearance of silver bullets. Up to now, EU has not fully endorsed set of the IFRS which was promulgated by IASB (Jermakowicz, & Epstein, 2008). Failure of EU to fully endorse these set of international standards is significant issues to several reasons, not the few which is requirement in the IAS1, financial statement presentation that is explicitly stated by a company that their financial statements are complying with the IFRS (McLaughlin, 2009). Companies are further not allowed to state their financial statements as complying with IFRS if it does not fully comply with whole body of the IFRS. The accounting standards so as to gain world wide acceptance, there is a need for them to be universally applied. It is necessary to have comparability. Financial statement set prepared using GAAP of country A is not comparable suddenly to another which is prepared using GAAP of country B since both of them on the top states IFRS (AICPA, 2010). United States key regulator priority is the consistent application of these standards. If to be accordance with the IFRS means the similar and same transactions have to be accounted in same way in every nation, then preparing financial statements according to IFRS will have to add value. Investors will no longer waste their effort and time in reconciling financial information when comparing to companies which are similar but in different countries (Subramani, 2009). Capital will then flow efficiently and at a low cost to companies in many places. Another major boost for acceptance of the IFRS was seen in 2002as the Norwalk Agreement was being signed and was reaffirmed in the Memorandum of Understanding in 2006. IASB in the London together with FASB in the Norwalk agreed to remove the differences in their standard sets and converge it on high-quality standards (Ernst & Young, 2009). The emphasis was on high-quality and this meant that if the FASB standards or IASB standard was deemed to be better, then the convergence was would be on the superior one. If neither of them had sufficient standards which would qualify to be used internationally, then the two boards would jointly work together to produce new standards. Work is on progress in developing a conceptual single framework which will guide in setting future standards. Convergence between U. S GAAP and IFRS do not mean accounting standards should become identical. It means that in the cases where the transactions are similar or the same, then the accounting should be just the same, or if not so, the disclosures should be transparent to enable reader understand about the differences (Subramani, 2009). Also the standard setters are putting more effort to reduce the difference which is in the two systems. Three significant differences between IFRS and GAAP. The difference between the two set of standards include the following: in the US GAAP in the income statement, extraordinary items is restricted to some items which are both infrequent and unusual (McLaughlin, 2009). Negative goodwill usually is treated as an extraordinary item. In the IFRS, income statement usually prohibits extraordinary items. In the US GAAP the significant items in the income statement are presented separately at the face of income statement just as component of operation going on, where as in the IFRS significant items in the income statement separate the disclosure of nature and also the amount required, but it can be included in income statement or notes (Ernst & Young, 2009). Changes in the equity in U. S PAAF are present in all the changes in every caption of the stockholders’ equity either in separate statement or foot note. Equity changes in IRFS at least, presents components which are related to expense and income recognized as section of separate statement (AICPA, 2010). Other equity changes are disclosed either in notes or presented as a part of one, combined statement in all equity changes. Three similarities between IFRS and GAAP. In both accounting standards, exchange losses and gains on the settled items and also on the monetary items which are unsettled should be taken to loss or profit for that period. When loss or gain on non-monetary items is directly recognized in equity, then that loss or gain is further taken to the equity (Ernst & Young, 2009). On the other hand if losses or gains on non-monetary item are taken in loss or profit, then related component of exchange would further be included in loss or profit. Functional currency should be currency of primary economy in environment the business is operating. The other currencies should be treated or termed as foreign currencies. Presentation of currencies should be currencies used in presenting financial statement and is usually matter of one’s choice (AICPA, 2010). Financial statements should be prepared by the functional currency of the entity but may be presented by any other form of currency. Individual transactions should be translated at rate on date of transaction, or at any average rate for period if the rates do not significantly fluctuate. Identify three potential risks of IFRS and GAAP convergence. There are several risks which may affect companies as a result of the convergence. They include that; the convergence may risk tax rate and thus making it not to be effective to some companies, it may also risk the long term financial agreements and contracts, and it may also risk timing of the revenue recognition (Ernst & Young, 2009).