International Financial Reporting Standards are gaining support around the globe

Question

International Financial Reporting Standards are gaining support around the globe. In 2007, the SEC eliminated the requirement for foreign companies that issue stock in the United States to include in their financial statements a reconciliation of IFRS to U.S. GAAP. There also is serious discussion of allowing U.S. companies to choose whether to prepare their financial statements according to U.S. GAAP or IFRS.

Many outside of the United States claim that a problem with U.S. GAAP is that there are too many rules. They argue for principles-based accounting standards in which the broad principles of accounting are emphasized and less emphasis is placed on detailed implementation rules. Americans counter that IFRS may lack quality and rigor. Additional rules are necessary to provide adequate guidance to users.

Read Appendix E in your book; review the information in Required: Chapter 6 Research Assignment in Lessons, Chapter 6; and perform internet research to answer the following questions.

Requirements:

Describe the two major reporting standards in the world.

Research and name which countries use GAAP vs. IFRS.

Explain the difference between principles and rules-based accounting standards.

Explain the advantages of each approach.

Explanation / Answer

GAAP (US Generally Accepted Accounting Principles) is the accounting standard used in the US, while IFRS (International Financial Reporting Standards) is the accounting standard used in over 110 countries around the world. GAAP is considered a more “rules based” system of accounting, while IFRS is more “principles based.”

Advantages and Disadvantages of Principles-Based Accounting Standards

Advantages of Principles-Based Accounting Standards

Disadvantages of Principles-Based Accounting Standards

Advantages and Disadvantages of Rules-based Accounting Standard

Advantages of Rules-based Accounting Standard

Disadvantages of Rules-based Accounting Standard

Description GAAP IFRS Stands for Generally Accepted Accounting Principles International Financial Reporting Standards Introduction Standard guidelines and structure for typical financial accounting. Universal financial reporting method that allows international businesses to understand each other and work together. Used in United States Over 110 countries, including those in the European Union Performance elements Revenue or expenses, assets or liabilities, gains, losses, comprehensive income Revenue or expenses, assets or liabilities Required documents in financial statements Balance sheet, income statement, statement of comprehensive income, changes in equity, cash flow statement, footnotes Balance sheet, income statement, changes in equity, cash flow statement, footnotes Inventory Estimates Last-in, first-out; first-in, first-out; or weighted-average cost First-in, first-out or weighted-average cost Inventory Reversal Prohibited Permitted under certain criteria Purpose of the framework US GAAP (or FASB) framework has no provision that expressly requires management to consider the framework in the absence of a standard or interpretation for an issue. Under IFRS, company management is expressly required to consider the framework if there is no standard or interpretation for an issue. Objectives of financial statements In general, broad focus to provide relevant info to a wide range of stakeholders. GAAP provides separate objectives for business and non-business entities. In general, broad focus to provide relevant info to a wide range of stakeholders. IFRS provides the same set of objectives for business and non-business entities. Underlying assumptions The "going concern" assumption is not well-developed in the US GAAP framework. IFRS gives prominence to underlying assumptions such as accrual and going concern. Qualitative characteristics Relevance, reliability, comparability and understandability. GAAP establishes a hierarchy of these characteristics. Relevance and reliability are primary qualities. Comparability is secondary. Understandability is treated as a user-specific quality. Relevance, reliability, comparability and understandability. The IASB framework (IFRS) states that its decision cannot be based upon specific circumstances of individual users. Definition of an asset 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.

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