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SEC’s “Commission Statement in Support of Convergence and Global Accounting Standards"
It is estimated that 120 countries are into international trading, which likewise involves the presentation of financial reports as a matter of requirement. At present, an approximate number of 90 countries submit financial reports that conform with the International Financial Reporting Standards (IFRS). Such reports include the accountant’s certification that the statements contain accounting information prepared and presented in accordance with internationally accepted accounting principles and procedures. In view of this, other countries like Canada, Japan, Korea and Mexico have taken steps to adopt IFRS GAAP in order to conform to the standards of global accounting, and will be fully effective by 2011-2012. The U.S. through the initiative of the SEC and issuance of “Commission Statement in Support of Convergence and Global Accounting Standards", is also on the threshold of converging US GAAP with IFRS GAAP. This is expected to attain full transition by 2015.
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The Effects of US GAAP vs. IFRS GAAP Differences and its Convergence
While some sectors of the business community are moving for full adoption of the IFRS rules and policies on international reporting, there are those who oppose the idea. The latter maintain that mere convergence or threshing out specific differences will already serve the purpose. This is in view of the existence of certain financial statement users and issuers, who do not deal with international trade. Their concern is that in fully adopting IFRS GAAP, this will result to more costs than benefits, although dependent on the nature and the size of the business. Staff re-training and programming revisions in accounting software, are only a few of the costs they have to face but without benefit on their parts.
As mentioned earlier, IFRS deals only with fewer and less extensive accounting requirements if compared to the standards set by the GAAP rules. This is another reason why others are also of the opinion that certain qualities of high standards will be lost, if IFRS accounting will be fully adopted. In line with SEC’s mandate, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working together to resolve the differences between US GAAP vs. International GAAP. The joint project is said to have resulted to changes being adopted not only in US GAAP’s standard of reporting but also in the IFRS’s own set of principles.
For a better understanding, we have listed below some examples of the established key differences between US GAAP vs. IFRS GAAP:
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Examples of Key Differences between US GAAP and the International Financial Reporting Standards
(1) Where US GAAP upholds SEC’s 3-year comparative financial statement presentation, IFRS requires only 1-year presentation of comparative financial information.
(2) US GAAP requires that the changes in equity should be presented by showing a “statement of comprehensive income", which may be done as part of the income statement, or as a separate Statement of Comprehensive Income or as Statement of Changes in Equity. By comprehensive income, it means that the net income or net loss should be presented as an item that increases or decreases the equity balance. In international financial reporting standards, only the presentation of Statement of Changes in Equity is required, wherein comprehensive income presentation is not mandatory. Net income or net loss can be directly added or deducted to or from the equity, without the necessity of presenting the income or loss for the year.
(3) Refinanced loans if completed before the date of financial statement issuance is presented as a non-current liability by US GAAP standards, while IFRS considers refinanced loans as non-current if the transaction is completed before the balance sheet date.
(4) US GAAP allows the costs of spoilage and idle capacity in inventory while IFRS does not.
(5) US GAAP allows the use of LIFO while IFRS does not permit this inventory costing method.
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(6) Write-downs or the reduction of inventory value due to significant overvaluation, if compared to current market value, can be reversed in IFRS accounting if certain criteria are met. US GAAP simply prohibits the reversal of any write-downs.
(7) US GAAP implements the Completed Contract method, if percentage of completion cannot be applied in construction contracts. As opposed to IFRS accounting, wherein the cost recovery method is used.
(8) US GAAP distinguishes deferred tax on asset or liability as current or non-current based on the asset or liability for which the tax has been deferred, while IFRS recognizes deferred taxes as always current.
(9) US GAAP requires historical costs as bases for the book values of property, plant and equipment while IFRS allows revalued amount aside from historical cost. Revalued amount is one where the fair value of the asset will be reduced by subsequent depreciation and impairment costs.
(10) US GAAP recognizes as expenses the major costs of overhauling or repairing assets, while IFRS accounting treats major cost of repairs as additional or capitalized value of the asset for which the repairs were made.
(11) US GAAP does not allow recognition of gains or losses in the disposition of non-current assets, while IFRS GAAP recognizes gains or losses in said transactions.
(12) US GAAP requires a more detailed disclosure of lease maturities, while IFRS GAAP entails fewer details for its disclosure.
(13) US GAAP does not impose any limitations in the recognition of pension assets, while IFRS GAAP limits the value of pension assets to the net value of unrecognized cost of past services and actuarial costs including the current value of benefits derived from refunds, or any reduction of future contributions to the plan.
(14) US GAAP requires capitalization of interests costs on borrowing only, as against IFRS accounting which allows capitalization of all borrowing costs in relation to its asset.
(15) US GAAP accounting allows equity method in assigning valuation on investments in subsidiaries, while IFRS accounting mandates either cost method or IAS 39, but does not allow the equity method.
(16) In US- GAAP, minority interests are presented exclusively which may be between liabilities and equity; in IFRS, minority interests are included in the equity account.
(17) Impairment loss if any is measured by US GAAP standards based on fair market value. IFRS GAAP on the other hand, considers the recoverable amount which is the difference between higher values less fair market value less the selling costs.
(18) US GAAP does not capitalize development costs except costs for website development and those associated with the development of internal software, while IFRS mandate capitalization subject to certain criteria.
(19) US GAAP accounts for investments in unlisted equity instruments at cost while IFRS allows flexibility by using fair market value if it is considered as a reliable measure.
(20) US-GAAP accounting prohibits offsetting of amounts due and owed to two different entities while IFRS allows said accounting method if there is a legal-agreement to support the offsetting of transactions.
The above differences between US GAAP vs. International GAAP represent only a few of the accounting and reporting standards being resolved by the FASB and the IASB. Based on these examples, users and issuers of financial statements, whether engaged in international trade or not, will have an idea of the changes to expect in relation to their respective businesses.
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Reference Materials and Images Credit Section
- Wikimedia Commons