A Comparison of U.S. GAAP and IFRS Accounting Methods

Author: John Sbarbaro

A Comparison of U.S. GAAP and IFRS Accounting Methods
U.S. GAAP (United Sates Generally Accepted Accounting Principles) and IFRS (International Financial Standards Board) are the two primary accounting standard setters in the world today. In an effort to move towards Globalization all participating organizations need to be on board with the same practices. If all organizations use the same accounting practices, they can all be compared to one another on the same level (less work for investors).

Currently, Organizations in the United States follow the U.S. GAAP. This is so accountants use the same rules (set by the Financial Accounting Standards Board (FASB)) to prepare financial statements as other companies' accountants. The reasoning behind all of this is so financial statements can be compared between other companies or from different time periods within a company.

IFRS is a Principle based reporting system that has rules in place to govern the way transactions are interpreted. Under this design, certain transactions can be interpreted differently in the financial statements. A complication with IFRS is that this situation can lead to different outcomes.

Principles Based vs. Rules Based
U.S. GAAP is a rule-based system put in place to maintain the legal practices of accountants. U.S. GAAP has many more rules in place than the IFRS does. Because of this, fewer transactions are incorrectly logged and the companies that follow these rules will be less susceptible to law suits for accounting mistakes.

The methodologies used by each system to assess an accounting treatment are different, but each is thorough in their own way. IFRS will focus their review on the facts pattern, while U.S. GAAP will focus their attention on the literature.

Differences between U.S. GAAP and IFRS
Statement of Income – Under the U.S. GAAP guidelines, extraordinary items areidentified under net income, while IFRS identifies them as regular transactions.

Earnings Per Share - U.S. GAAP and IFRS have many similarities when it comes to classification of both basic and diluted Earnings Per Share. However, there are many differences that make it difficult to compare entities using the two different reporting systems. Notable differences include:

Diluted Earnings Per Share year-to-date calculation - The number of dilutive potential ordinary shares in the YTD period is not a weighted average under IFRS, but it is under U.S. GAAP.

Instruments with multiple settlement alternatives -IAS states that if an effect is dilutive, contracts must be settled with either cash or common stock (the organization's option), and this presumption cannot be overcome. Under ASC, a similar presumption exists, but it can be overcome if the entities policy or practices allow it, and the entity may settle it partially or completely in cash.

Cash and cash equivalents – IFRS addresses Cash and Cash equivalents in the Statement of Cash Flows. Under U.S. GAAP, it is addressed in Cash and Cash Equivalents. Both identify Cash and Cash Equivalents in a similar manner, however the IFRS description of Cash and Cash Equivalents is less specific that U.S. GAAP. For example, under U.S. GAAP money market funds may be considered cash equivalent. Under IFRS, certain investments with maturities over three months may qualify as a cash equivalent. IFRS considers cash equivalents as an asset "held for the purpose of meeting short-term cash commitments rather than for investment or other purposes". To the contrary, U.S. GAAP will use cash equivalents as a short-term investment opportunity, where IFRS will not.

Liabilities – Entities from both U.S. GAAP and IFRS extinguish liabilities in a similar manner by using assets to release obligations from creditors. ASC allows organizations to extinguish an obligation by using a noncash asset to meet the needs of a creditor. IAS has no such guidance.

Inventory – LIFO is prohibited from use under IFRS, but organizations that follow the U.S. GAAP may use LIFO or FIFO.

What To Expect When Your Organization Makes The Transition
The financial departments and operations will have to reorganize how they gather information. Human Resources will need to redesign many of their compensation packages.
This will also affect the ways management will format data and report it to their superiors.

Is There Something That Can Be Done To Anticipate The Transition
When making long-term transactions, whether investments, or payables, viewed through "IFRS lenses". This way there won't be any surprises when your organization switches from U.S. GAAP to IFRS. This method can also be taken when considering or implementing mergers.
We will not be the first to make the transition from GAAP to IFRS (the U.K. did this years ago). U.S. companies can and should learn from any mistakes that were made during the U.K.'s transitional period to ensure ours is much more efficient.

Posted in: Accounting