GAAP Vs IFRS: A Comparison Paper
Introduction
International Financial Reporting Standards and Generally Accepted Accounting Principles are financial methodologies that are utilized by several firms when undertaking financial reporting or recording. This paper transcends a comparison of GAAP and IFRS. Conventionally, GAAP and IFRS vary regarding the rules they apply to financial reporting. Arguably, the major difference between the GAAP and the IFRS is in its geographical applicability. The GAAP is applicable in the financial arena in the US as the IFRS is an applied globally by approximately 100 countries (PWC, 2015). Also, it should be noted that when defining asset/resources category, the GAAP stipulates an asset as an economic advantage to the future while the IFRS indicates that an asset is a resource whose economic advantage is realized by the firm. Furthermore, the differences between the GAAP and the IFRS are often applied at different levels with the dynamics of finance. As such, this paper will outline a number of aspects that differentiate the two.
Fair Value Measurement
The accurate values of assets of a company are demonstrated by the fair value measurements. Accounting professionals utilize the fair value measurement as an indicator of the economic or monetary indicator or comparable of a particular asset in a firm. Both the GAAP and the IFRS perspectives provide for asset accounting by using their book value or fair value depending on the fundamental conditions. Regarding inception losses and gains within the GAAP, if an asset or liability was measured at a fair value then the differences between the fair value and the transaction price is categorized as loss or gain of income. Alternatively, the IFRS stipulates that the inception losses or gains cannot be recognized for accounting unless the asset’s fair value was depicted by a quoted price in an active market for a similar asset or liability. Regarding Net asset value (NAV) practical measure, in GAAP, there is a practical measure that allows for a firm with an investment in investment to use the reported NAV without adjustments. The IFRS, on the other hand, does not provide a NAV practical measure. Also, the GAAP defines the fair value measurement of a deposit liability as a quantity allocated on demand as of the reporting date. The IFRS, explains the fair value of financial liability demand with a demand feature as not less the present value of the amount payable on demand (Christensen & Nikolaev, 2013).
Component Depreciation
Component depreciation occurs when the modules of an asset depreciate independently. IFRS recognizes component depreciation if the various modules of asset create impactful patterns that benefit the firm. The GAAP system does not require the approach of component depreciation since there is no obligation of reviewing residual values.
Revaluation of Plant Assets
Re-valuation refers to the altering the book value of a given asset to fair value which occurs during economic changes that are noticeable within the market. IFRS rules state that revaluation necessitates all assets in a particular class to be placed under the same valuation process for consistency in all firms when evaluating assets of the same nature. As such, the capacity to revalue assets to their fair value under the principles of IFRS might create significant differences in the carrying value of assets in comparison with the GAAP.
Product Development Expenditures
The difference between the development costs and development expenses is defined by the utilization of GAAP and IFRS. GAAP stipulates that all the costs that are spent on research and development are recorded on the income statement. Alternatively, IFRS aligns or adjusts these costs to research costs. Therefore, for technological viability, a firm will choose to report the development costs (Christensen & Nikolaev, 2013).
Contingent Liability
Contingent Liability is essentially a foreseen commitment. The odds and the likelihood of such determinations are confident to the point that the organization should be prepared for it at whatever time. Despite the fact that they can’t be displayed in the books of records, nevertheless, their thought is indispensable. In each bookkeeping periods, it’s important for an association to observe the amount of an unexpected obligation. A case of such are fines forced on organizations on the off chance that they make harm some property or environment (PWC, 2015). The organization is uninformed of the correct estimation of fines coordinated to it, yet are demonstrated as unforeseen liabilities in the notes. This will extraordinarily help amid money related detailing.
Accounting for Liabilities
As saw above, both GAAP and IFRS have fundamental likenesses that help with bookkeeping recording and announcing. Their disparities are underlined on different issues. To start with, liabilities under GAAP are recorded at the request of liquidity where IFRS uses the switch arrange. At the point when announcing interest costs, IFRS permits recording of loan fees techniques while GAAP accentuates on both compelling financing cost and straight line strategies.
Conclusion
Conclusively, both GAAP and IFRS are apparatuses used to execute elevated expectations of accounting standards. They are apparatuses that see to it that the macroeconomic environment is very much depicted in the book of records. They are working as one in actually modernizing bookkeeping rules in the ever dynamic financial atmosphere.
References
Christensen, H. B., & Nikolaev, V. V. (2013). Does fair value accounting for non-financial assets pass the market test? Review of Accounting Studies, 18(3), 734-775.
PWC. (2015). IFRS and US GAAP:similarities and differences. Analysis Report, PWC.
Van der Meulen, S., Gaeremynck, A., & Willekens, M. (2007). Attribute differences between US GAAP and IFRS earnings: An exploratory study. The International Journal of Accounting, 42(2), 123-142.
