U.S. GAAP and IFRS There Two General Essay

U.S. GAAP and IFRS

There two general approaches to accounting in the world: Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). In the United States, GAAP is the standard approach, and the standard American system is referred to as U.S. GAAP. However, the Security and Exchange Commission is looking to switch to IFRS by 2015, the system used in the European Union and many other countries (Loque, 2013). In fact, the United States has been moving towards IFRS for a number of years. This long period of convergence has provided an opportunity for reconciliation of the main differences between the two systems. However, there remains at least one significant difference: "U.S. GAAP is rule-based, whereas IFRS is principle-based. The inherent characteristic of a principles-based framework is the potential of different interpretations for similar transactions. This situation implies second-guessing and creates uncertainty and requires extensive disclosures in the financial statements" (Forgeas, 2008). This paper will explore three of the differences between U.S. GAAP and IFRS and discuss the implications of those differences.

One of the differences between the two systems is when the systems become applicable. "Retrospective application of all U.S. GAAP, effective at the reporting date, is required for a company's first U.S. GAAP financial statements" (Romeo, 2008). IFRS's retrospective application requirements are more difficult to understand, but appear to be less rigid. "Retrospective application of all IFRSs, effective at the reporting date is required for an entity's first IFRS financial statements, with some optional exemptions and limited mandatory exceptions" (Romeo, 2008). These exceptions will no doubt prove beneficial as the U.S. transitions from U.S. GAAP to IFRS. Furthermore, "An entity shall explain how the transition from previous GAAP to IFRS affected its reported financial position, financial performance and cash flows.To comply with this transition requirement, reconciliations from previous GAAP to IFRS are required for reported equity at the date of transition to IFRS (i.e. The beginning of the earliest period presented in the first IFRS financial statements) and equity and profit and loss (P&L) at the end of the latest period presented under the previous GAAP. The reconciliation should provide sufficient detail to enable users to understand the material adjustments to equity and the impact on profit or loss" (Romeo, 2008). These rules help explain how a company can transition between two different accounting systems, because it allows for an explanation of the transition from GAAP to IFRS. In addition, "if the entity also presented a statement of cash flows under its previous GAAP, it shall explain any material adjustments to the statement of cash flows" (Romeo, 2008). These requirements almost seem geared at ensuring that a company does not use the change in accounting systems as an opportunity for creative number manipulation, because of the requirement that changes be explained. Finally, "For annual periods beginning on or after 1 January 2009, a first-time adopter is also required to present its opening balance sheet at the date of transition to IFRS" (Romeo, 2008). This requirement seems perfectly sensible because, by that date, it was well established that the U.S. was transitioning from U.S. GAAP to IFRS. Furthermore, by examining the differences between the requirements, it becomes apparent that a transition….....