Accounting

Running head: IFRS VERSUS U.S GAAP 0

IFRS versus U.S GAAP

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3 examples of the differences between the 2 sets of standards

The major difference is that IFRS is based on principles whereas GAAP is based rules.

This means that IFRS as a standard that applies principles in its framework, there is a potential for various interpretation of the same transactions. Different interpretations on a similar transaction mean that there are higher chances getting extensive disclosures in the financial statements (Kieso, Weygandt & Warfield, 2010). Principle based standard has the capacity of clarifying unclear areas while a rule based system cannot. GAAP on the other hand uses rules which means that interpretation on similar transitions can never be different hence chances of extensive disclosures on financial statements are very minimal.

IFRS and GAAP use different methodology to assess the treatment of accounting.

Under GAAP the research tends to be more inclined towards literature (Rich, 2012). On the other hand, under IFRS the research and review on accounting treatment is not only focused on literature but is more thorough on the facts and pattern.

Different treatment of intangible assets.

This difference is majorly contributed by the fact that IFRS is based on principles. Under GAAP, the acquired intangible assets such as advertising costs and research and development (R&D) costs are recognized at fair value (Whittington & Churyk, 2015). On the other hand, under IFRS, intangible assets are only recognized if they have measured reliability and have a future economic benefit.

The differences in classifications of cash flows between IFRS and U.S. GAAP

IFRS and GAAP vary in their classification of most cash flows such as the paying of dividends. For instance some activities in one system may be operating cash flows while under the other they are investing or financing activities. One of the major differences is that IFRS and GAAP is how classification of interest paid is done (McEwen, 2009). Under the GAAP system, a payment of a loan is broken down into the payment of interest (operating) and payment on principal (financing). On the other hand, under the IFRS system, the loan repayment parts; principal and interest can both be classified as financing cash flows. However, all of the other major operating cash flows under both systems of IFRS and GAAP are classified the same way.

Transactions	Classification under U.S GAAP	Classification under IFRS
Interest paid	Operating	Operating or financing
Dividends paid	Financing	Operating or financing
Interest received	Operating	Operating or investing
Dividends received	Operating or investing	Operating or investing
Income taxes paid	Operating	Operating

Impacts that the differences will have on U.S companies

Most U.S. companies use the GAAP system which is based on rules while companies outside the U.S use the alternative system of IFRS. There have been efforts on the convergence of the two accounting standards, GAAP and IFRS, so as to establish a single set of accounting standards that will be used all over the world (Shamrock, 2012). The convergence is also aimed at reducing the differences between the two standards. U.S. is moving towards IFRS.

The U.S. companies will be impacted on the sense that their finance departments will have to update their processes. Operations will also have to be updated due the fact that they will face a great impact particularly on how information is gathered as well as maintained or how contracts are written (Kieso, Weygandt & Warfield, 2010). On Human Resources (HR), the U.S. companies will have to review their compensation packages particularly to link them the performance of the business.

The management reporting and IT of the U.S. companies will also be impacted on the fact that transition to IFRS will require changes on the two elements. For instance, systems of these companies will have to be upgraded so as to comply with IFRS 7 – Financial Instrument Disclosures on gathering of information on liquidity risks (Rich, 2012). On the other hand, these companies will also have to have defined procedures that enable the gathering of and review of the research and development (R&D) costs that may be capitalized.

Differences with the classifications of contingent liabilities between U.S. GAAP and IFRS

	IFRS	U.S. GAAP
Definitions	A contingent liability is defined as a possible obligation that arises from past events and whose existence is only confirmed by the occurrence or the non occurrence of one or more the uncertain events in the future (Whittington & Churyk, 2015).	A contingent liability is defined as an existing situation or condition that involves uncertainty as to possible loss.
Recognition threshold	For a loss to be recognized, it must be probable whereby probable is more likely (probability of greater than 50%)	A general loss contingency must be probable for it to be recognized. Probable is interpreted as a high likelihood without the reference to any percentage.
Onerous contracts	An onerous contract is interpreted as a contract whereby the unavoidable costs of meeting the obligations under the contract are more than the expected benefits.	Obligations that arise from onerous contracts are commonly recognized unless they are specifically required by other U.S GAAP (Rich, 2012).
Discounting	Discounting of the anticipated cash flows to settle an obligation is done using a pre-tax discount rate.	In most case, general loss contingency is not discounted unless the aggregate amount of the liability and the timing of cash payments for the liability are determinable or fixed (Kieso, Weygandt & Warfield, 2010).
Restructuring costs	For the provision of restructuring costs to be recognized, the general requirements for the recognition of a provision have to be met (Whittington & Churyk, 2015).	Typically, a restructuring liability is measured at its fair value and is only recognized if it represents a current or present obligation.
Measurement	For provisions to be recognized they have to be reliably estimable. In case, there is a range of possible outcomes for the provision, the best estimate of the obligation should be the amount accrued (Rich, 2012). In case within the range there is no single outcome that represents the best estimate, then the midpoint of the range should be accrued.	For general loss contingencies to be recognized they will have to be reasonably estimable. In case there is a range of possible outcomes, the best likely outcome with the range should be the amount accrued (Kieso, Weygandt & Warfield, 2010). In case within the range there is no single outcome that is more likely than all the others, then the least amount (minimum) within the range should be accrued.

Cash and cash equivalents definitions between IFRS and U.S. GAAP

Both standards, IFRS and GAAP have the same definition of cash and cash equivalents. The definitions of both standards include cash as well as short term highly liquid investments with maturities of three months or less (Shamrock, 2012). However, despite the similar definitions, there are distinguishing features of each standard. On the IFRS standard, bank overdrafts may be included in cash and cash equivalents if they are an integral part of the cash management of an entity. On the other hand, under GAAP standard, the definition of cash and cash equivalents excludes the restricted cash.

The best estimate for the two standards of accounting varies. For IFRS, the best estimate is usually the midpoint of the range whenever there is no single outcome within the range (McEwen, 2009). For GAAP, the minimum amount in a range is usually the best estimate whenever there is no single outcome. The disclosure of risk and uncertainties in both standards, GAAP and IFRS is mainly focused on the extent to which they affect the amounts reported in the financial statements.

References

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2010). Intermediate accounting: IFRS approach. Hoboken, N.J: Wiley.

Rich, J. S. (2012). Cornerstones of financial & managerial accounting. Mason, OH: South-Western/Cengage Learning.

Whittington, R., & Churyk, N. T. (2015). Wiley CPAexcel exam review study guide January 2015.

McEwen, R. A. (2009). Transparency in financial reporting: A concise comparison of IFRS and US GAAP. Petersfield, Hampshire, Great Britain: Harriman House.

Shamrock, S. E. (2012). IFRS and US GAAP: A comprehensive comparison. Hoboken, N.J: John Wiley.