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GENERAL ACCEPTED ACCOUNTING PRINCIPLES 9

Generally Accepted Accounting Principles.

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US GAAP versus local GAAP in foreign countries

GAAP is described as Generally Accepted Accounting Principles. Usually these principles are referred to as US GAAP. These accounting principles are used by the United States Securities and Exchange Commission popularly known as SEC. over the recent past, the SEC have indicated the desire to change or transfer the US GAAP to IFRS, that is, International Financial Reporting Standards. However, there are several differences between the two and therefore the process of transfer has hit a snail speed for the last part of its implementation by the bodies mandated with this responsibility.

From the year 2008 (Jung, Park, & Chung, 2016), the Financial Accounting Standards Board, better known as FASB, has created publications of these accounting principles in XBRL, which is Extensible Business Reporting Language. For a very long time now, Security and Exchange Commission has been working together with the AICPA, American Institute of Certified Accountants in setting the accounting standards required of the various professionals and business enterprises. The US GAAP seeks to achieve important milestones in financial reporting. Some of the basic objectives that GAAP seeks to achieve include;

Provision of useful financial reports that can be presented to creditors and potential investors and other important stakeholders in making rational credit and investment, and most importantly in business financial decision making.
Financial reporting to be used in presentation to potential creditors and investors in assessing timing, uncertainty and amounts of the potential cash receipts regarding the economic situation, economic resources, the claims therein and any changes that could come up in the same.
The financial reporting should be concisely drafted to help businesses make bold and calculated financial decisions, especially when looking at investment.
The reports, as provided for by GAAP should be focused on helping businesses and professionals make long term goals and decisions likely to impact their organizations positively.
The most important aspect of the financial reporting should be on the performance of the business entities. GAAP ensures that the financial reports are presented on such an accurate and professional manner likely to help in predicting the performance of the business especially over a calculated duration of time.
Lastly, GAAP provides for the establishment of financial reports which will be useful in the maintenance of business records especially for organizations seeking to go global such as we have seen with Apple Inc.

Basic Concepts surrounding GAAP, and local GAAP

GAAP is committed to achieving the basic objectives explained above. However, getting to achieve such may not be very easy and simple. Therefore four constraints, principles and assumptions are used in implementing the qualities and objectives desired by GAAP.

These four principles are Revenue recognition principle, historical cost principle, matching principle and the full disclosure principle. Revenue recognition principle requires organizations or companies to have the revenue recorded when it has been earned but exactly at the time of receiving. The implication therefore is that, cash flow has no impact or bearing on revenue recognition. This forms the argument behind accrual basis accounting.

On the other hand, the business must acknowledge the possibility of losses occurring and therefore they must be recognized. The recognition should be done whether the firms are sure the losses have been incurred or not. So this then leads to conservatism yet the other constraint based on consistency. The two are always in conflict.

Historical cost principle on the other hand requires that companies are able to account and present reports on the liabilities and assets costs of acquisition instead of the fair market value. The information provided by this system is considered compact and reliable, but can sometimes be irrelevant. Therefore, fair values are mostly used. However, many securities and debts are being reported at the values of the market.

The matching principle on the other hand requires that expenses are matched with the revenues provided there is a reasonable ground for the same to be done. The full disclosure principle on the other hand, requires that information shared or disclosed should be decided with its basis on the analysis of trade-offs. Usually, when a bigger or larger amounts of information are required, the costs incurred over the same are huge. So therefore, the disclosed information should be relevant for making a judgement while at the same time costs should be kept down.

The assumptions are, going concern, monetary unit principle, business entity and the time period principle. Business entity makes the assumption of an available separation distance between the business from the owners and other business entities. There should be a separation between revenue and expenses (Ecker, Hjelström, Olsson, & Setterberg, 2016). The going concern assumes the business operations are set to continue indefinitely.

At liquidation, the going concern assumption cannot be applied to any businesses. The going concern assumes businesses will be in operations even in the unpredictable and unforeseeable future. Monetary unit principle on the other hand assumes that a very stable form of currency will stay in the market to be used for records unit. FASB legally recognizes and accepts the US dollar nominal value as the unit of record in this case. Finally, the time period assumption provides for the division of the economic activities of business enterprises into what FASB calls artificial time intervals or periods. The constraints consists of the materiality principle (Cormier, & Magnan, 2016), the cost constraint. The consistency principle, the conservatism principle and the objectivity principle.

Are there differences between the US GAAP and IFRS?

The answer to this question would obviously be a big yes. After its establishment in 2001, the International Financial Reporting Standards was absorbed by the EU (European Union) four years later. The key objective is that all the industry players in business globally will be able to understand the financial situation and positions of organizations they put their investments in. the standard system is equally important for the new capitalist countries such as China. The intention is to help them develop accounting standards acceptable all over the world and therefore be level with the others. Both US GAAP and IFRS are built on the same philosophy but they are some noticeable differences between the two accounting standards (Cormier, & Magnan, 2016).

For instance, for the IFRS (Cormier, & Magnan, 2016), the balance sheet is designed in such a manner to separate the current and noncurrent assets from liabilities while US GAAP just recommends this separation between the current assets, noncurrent assets and the liabilities (Cormier, & Magnan, 2016). On the deferred taxes (Cormier, & Magnan, 2016), the IFRS shows it as separately recorded items in the balance sheet while the GAAP simply has the deferred taxes, assets and liabilities put into an inclusion. The IFRS prohibits the occurrence of rare or extraordinary items in the reporting while the GAAP allows these items especially if they are infrequent and unusual.

On bank overdrafts, IFRS allows for their inclusion in cash especially if used in the management of the same. On the other hand, GAAP charges the same as cash used in financing some activities. Despite the differences, companies using GAAP are not likely to have big differences especially when looking at the relationship with IFRS. The reported results are likely to remain the same with slightly different issues here and there.

US GAAP and local GAAP.

There are several foreign countries or investment from developing nations with listings on the American Stock Exchange and New York Securities Exchange (Capkun, & Collins, 2016). As a matter of fact, these firms and organizations have been increasing exponentially over the last few years. Therefore (Capkun, & Collins, 2016), there is a lot of motivation to conduct an in-depth study and investigation of the accounting issues reported by the foreign issuers (Capkun, & Collins, 2016), especially from those developing nations of the world.

One of the most significant accounting issue remains the reconciliation between the US GAAP and the Local GAAP, when these issuers coming from the foreign markets apply to extensively comprehensive accounting body principles which can be achieved in their own backyards. Contrasting differences and variations are reported between the reported stockholders equity, equity returns and net income for several firms coming from the developing countries.

For instance (Capkun, & Collins, 2016), China, being a capitalist country, with its local GAAP may not find it easy getting into the US accounting system. In most cases, companies or firms outside of the US use their local GAAP in coming up with financial statements. For several countries, these accounting principles vary significantly from the US GAAP. Therefore, there is likely to be variations in the net incomes earned when GAAP is incorporated into the system. Therefore, for firms wishing to establish themselves in SEC, they must be ready to accept the US GAAP principles.

References

Capkun, V., & Collins, D. W. (2016). The Effects of IFRS Adoption on Observed Earnings Smoothing Properties: The Confounding Effects of Changes in Timely Gain and Loss Recognition. HEC Paris Research Paper No. ACC-2016-1140.

Cormier, D., & Magnan, M. L. (2016). The Advent of IFRS in Canada: Incidence on Value Relevance. Journal of International Accounting Research.

Ecker, F., Hjelström, T., Olsson, P., & Setterberg, H. (2016). Analysts’ Earnings Adjustments and Changes in Accounting Standards.

Jung, W. O., Park, S. O., & Chung, H. (2016). Debt Financing and Voluntary Adoption of the International Financial Reporting Standards: Evidence from Korean Unlisted Firms. Emerging Markets Finance and Trade, 52(1), 39-51.