GAAP Vs. IFRS As Globalization Begins to Essay

GAAP vs. IFRS

As globalization begins to hit full stride, new rules and customs must be addressed with older and more established practices. The International Financial Reporting Standards (IFRS) represents a global perspective on the accounting rules for global organization. The United States has followed their Generally Accepted Accounting Principles (U.S. GAAP) to dictate the regulations dealing with domestic companies. The purpose of this essay is to examine both of these institutions to investigate the similarities and differences of these organizations. This essay will give background on both of these sets of rules before using two real-world companies' financial statements to analyze the practice of these rules.

US GAAP vs. IFRS

In order for fairness to prevail in the marketplace, standardized comparisons must be available for investigation for investors. Financial statements are the great equalizer in providing this data as important and pertinent information may be deduced by experienced and talented accountants. Currently, there are a number of similar methods of tabulating between U.S. GAAP and IFRS financial statement preparation, there are also a number of differences that make it difficult for preparers and investors to compare financial statements between organizations.

Riordan & Riordan expose the main difference between these two methodologies is in their basic structure. They claimed that the IFRS was developed in an environment in which the standards were not required by regulators. As a result the international system is more flexible and is considered principle-based. The authors claimed " evidence of this flexibility is provided in the various benchmark and alternative treatments that still remain within some of the standards. As the primary example, historical cost is the benchmark for the valuation of property, plant and equipment, whereas current valuation is an acceptable alternative for valuation under IFRS [IAS 16]" (p.4).

The U.S. GAAP is an American standard that is considered more conservative than the IFRS. The U.S.GAAP is considered a rules-based methodology of bookkeeping that is primarily due to the high occurrences of litigation that occurs domestically. One example of U.S. GAAP's perceived conservatism deals with the IFRS allowing the recovery of value in connection with inventory write downs while allowing a subsequent increase for recoveries in value that the GAAP does not permit.

Gill (2007) highlighted some other discrepancies between the two systems. He pointed out that the IFRS does not require a precise form for accepting income statements, while the U.S. GAAP has an exact form with specific data that needs to be included. He continued his report by stating "even where the use of U.S. GAAP and IFRS result in the same assets appearing on a balance sheet, the values attributed to those assets may be different. IFRS permits an entity to regularly revalue property, plant and equipment to fair market value. An entity cannot pick and choose under IFRS, however, and if it revalues one item within a class of assets, it must revalue all items within the same class. IFRS provides for crediting increases in values to a revaluation reserve in the equity section of the balance sheet while decreases in values are treated as expenses to the extent the decreases exceed any previous revaluation increases."

Explaining Key Terms

It is important to be grammatically correct when discussing matters that are language-sensitive such as accounting income statements. Expenses are deductible against income and cannot depreciate. Assets are not tax deductable against income but can be depreciate. In other words, assets are future-based ideas that predict income and expenses are real-time hindrances that are counting against you now and only now. Before examining a company's income statements it is important to understand the difference between….....