By
Mounir Boukitab
GAAP, Generally Accepted Accounting
Principles, is the accounting standard used in the US, UK, Japan, China and
other handful countries, while IFRS, the International Financial Reporting
Systems, is the accounting standard used in the majority of countries around
the world including all the members of the European Union. These two accounting
frameworks are not the only ones used around the globe but, by far, they are
the most adapted by international companies and corporations that function in
our current unified global market. In this article, I will briefly present some
of the differences of these two accounting frameworks.
With the widespread of the Internet
and the rise of Globalization, there has been a dramatic increase of
cross-border financial and commercial flows around the world. Companies,
corporations, banks and financial institutions have been expanding their
activities globally, taking advantage of the more open economy system that is
increasingly adapted in the developed and ex-communist countries. This globalization
of finance and commerce has created major challenges for the accounting
professionals who need to disclose financial reports for Multinational
companies and their overseas subsidiaries that adapt different accounting
frameworks. This dilemma has increased the need of a global accounting
framework that bridges all the compatibility gaps among the several accounting
standards that existed in different marketplaces. Consequently, two accounting
systems has emerged as the two main frameworks that are used in most countries
around the world nowadays which are: GAAP and IFRS.
However, there is still major
differences between these two accounting standards in spite of the great
efforts that lawmakers and accounting professional's bodies in the largest
economies of the world have made in eliminating these differences. The major
one is that IFRS is considered more of a "principles based"
accounting standard in contrast to U.S. GAAP which is considered more
"rules based." By being more "principles based", IFRS represents
and captures the economics of a transaction better than U.S. GAAP. Moreover,
here are some of the main other differences according to, "IFRS and US
GAAP: similarities and differences", an article published by Price
Waterhouse Cooper last month that outlines these differences and the importance
of understanding both frameworks for today's investors:
1. Revenue recognition:
Under GAAP, Revenue recognition
guidance is extensive and includes a significant volume of literature issued by
various US standard setters. Generally, the guidance focuses on revenue being
(1) either realized or realizable and (2) earned. Revenue recognition is
considered to involve an exchange transaction; that is, revenue should not be
recognized until an exchange transaction has occurred.
Under GAAP, Two primary revenue
standards capture all revenue transactions within one of four broad categories:
Sale of goods, Rendering of services, Others' use of an entity's assets
(yielding interest, royalties, etc.) or Construction contracts. Revenue
recognition criteria for each of these categories include the probability that
the economic benefits associated with the transaction will flow to the entity
and that the revenue and costs can be measured reliably. Additional recognition
criteria apply within each broad category
2. Expense Recognition:
Under IFRS, the measurement effects
are recognized immediately in other comprehensive income and are not
subsequently recorded within profit or loss, while US GAAP permits two options
for recognition of gains and losses, with ultimate recognition in profit or
loss.
Note that Gains and losses as
referenced under US GAAP include (1) the differences between actual and
expected return on assets and (2) changes in the measurement of the benefit
obligation. The measurements under IFRS, as referenced, include (1) actuarial
gains and losses, (2) the difference between actual return on assets and the
amount included in the calculation of net interest cost, and (3) changes in the
effect of the asset ceiling.
3. Assets:
The US GAAP framework defines an
asset as a future economic benefit. The IFRS framework defines an asset as a
resource from which future economic benefit will flow to the company.
4. Financial Liabilities and Equity:
As an overriding principle, IFRS
requires a financial instrument to be classified as a financial liability if
the issuer can be required to settle the obligation in cash or another
financial asset. US GAAP, on the other hand, defines a financial liability in a
more specific manner. Unlike IFRS, financial instruments may potentially be
equity-classified under US GAAP if the issuer's obligation to deliver cash or
another financial asset at settlement is conditional. As such, US GAAP will
permit more financial instruments to be equity-classified as compared to IFRS.
Even though the American companies
are only required to use GAAP for their SEC filings in the US, they are more
effected by the IFRS principles in reporting their subsidiaries' financial
outcomes overseas. The differences that still exist between the two accounting
frameworks may change the results of the reporting. Therefore, the SEC needs to
gradually refine and update the GAAP's principles in order to narrow the
current gaps and entirely eliminate them in a few years.
