Comparison between Accounting Standards - IFRS UK & GAAP USA
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This article discusses the comparison between accounting standards IFRS UK & GAAP USA, their objectives, areas of divergence, and similarities. It also defines IFRS and GAAP and their importance in financial reporting.
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INTRODUCTION TO ACCOUNTING
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COMPARISON BETWEEN ACCOUNTING STANDARDS – IFRS UK & GAAP USA InternationalFinancialReporting Standards. Universal business language or method of financial reporting adopted by companies globally. ItisdevelopedbyInternational AccountingStandardBoard (IASB). Based on Principles. GenerallyAccepted Accounting Principles. Asetofaccounting procedures. It is developed by Financial AccountingStandardsBoard (FASB). Based on Rules. OBJECTIVES To establish universal language for the preparation of financial statements. Toestablishrulesformakinginterpretationby stakeholders easier. To ensure credibilityand transparencyof financial position of a concern. Toassistcompaniesincategorizingandreporting financial data. To establish comparison of financial performance at international level. To assist in disclosing financial performance accurately. To establish clarity in the minds of stakeholders. To encourage understanding of financial reporting in an understandable manner. To provide financial reporting guidelines to US based companies. Tofacilitaterationaldecisionmakingbyinvestors, creditors and any stakeholders of US based company. Areas of Divergence Financial statement Presentation Recognition of Accounting Elements Measurement of Accounting Elements Disclosures and Terminology Bothareguidingprinciplesandassistsinpreparingand presenting financial statements. Thereisaprofessionalbodybywhomtheseaccounting standards have been issued. The characteristics such as relevance, transparency, reliability, comparability and understandability ensured by both of these accounting standards. IFRSGAAP Set of accounting procedures and guidelines followed by US based companies Universal business language followed by international companies. LIFO method is not permissible.LIFO method is permissible. No segregation of extraordinary items within income statement. Extraordinary items are shown below income statement. Inventory reversal is permitted.Inventory reversal is not allowed. SIMILARITIESDIFFERENCES
Definition of IFRS: It stands for International Financial Reporting Standards which adopted at global level and is issued by International Accounting Standard Board. It is a set of guidelines & rules which is necessary for every firm to adopt in order to make sure that their financial statements are able to satisfy consistency with the financial statements of other firms across the globe (Anantharaman and Chuk, 2020). Definition of GAAP: It stands for Generally Accepted Accounting Principles. It is a standard framework, procedures and principles that is being adopted and used by US based companies for the purpose of financial accounting. The principles have been issued by Financial Accounting Standard Board (Kouki,2018). The set of accounting standards within it provides rules and standard ways for recording & reporting of company’s financial data. Objectives of different accounting standards i.e., IFRS & GAAP Objectives of IFRS There are many purposes for which IFRS has been developed such as the following: To introduce a common law that is to be adopted by all companies at global level to ensure consistency and comparability within their financial statements, so that a universal way of financial reporting can be established for all internationally operating business (Cussatt, Huang and Pollard, 2018). To assist stakeholders in carrying out analysis of financial performance of the company along with correctly interpreting a concern’s financial position. When IFRS is followed while preparing books of accounts, then the financial record ensuresreliability,accuracy,uniformityandappropriatenessandthusthereisan availability of high quality financial data on the basis of which investors make informed economic decisions. Objectives of GAAP The purpose for which GAAP has been developed are as follows: To promote the understanding of how financial reporting can be done in transparent manner (Kouki, 2018).
Toencourageaccuratedisclosureoffinancialinformationinordertoensurea presentation of reliable financial performance and position among users of accounting information through appropriate preparation of financial statements, so that users can make informed decisions. To make financial reporting uniform and transparent in order to reduce confusion among stakeholders by providing standard guidelines to companies. Areas of divergence between IFRS & GAAP There are basically four areas at which IFRS & GAAP get diverge with reference to financial reporting, which are as follows: Financial Statement Presentation: Under GAAP, presentation for three periods have been done as against IFRS where presentation for two periods are required while preparing income statement. Also, assets are recorded in decreasing and increasing order of liquidity within GAAP and IFRS respectively (Buesa, Población García and Tarancón, 2020). Recognition of accounting elements: To determine whether an item is to be recognized as expenses, revenue, asset or liability, there are different rules and principles for the same within IFRS and GAAP. For instance, the term contingent liability is used with GAAP while the term “provision” is being used within IFRS and also recognition is done at a threshold of >=75% and >50% respectively. Measurement of Accounting Elements: There is a difference in measuring accounting elements with respect to IFRS and GAAP. For instance, within GAAP, both FIFO & LIFO method are permissible whereas LIFO method is not permissible within IFRS. Also, valuation of fixed assets is different as GAAP follows a tendency that value of fixed assets can only be reduced and cannot increase in any circumstances. On the hand, IFRS employs fair value measurement while reporting fixed assets where changes can be both positive and negative. Disclosures & Terminology: The difference also lies in the inclusion of information within the footnotes of the financial statements. For instance, extraordinary items are shown in income statement within their footnotes in case of GAAP whereas there is no such segregate segment for disclosing extraordinary items in case of IFRS (Turlington, Fafatas and Oliver, 2019). Also,
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terminology differs in both of these standards such as the term contingent liability is used in GAAP while the term provision is used in IFRS. The existence of these divergence within IFRS and GAAP leads to differences in these accounting standards, whereas there are some similarities lies between these standards of preparing presenting financial statements of the company, such as the following: Both IFRS and GAAP act as a guiding principles and are issued by professional body that assists in preparing financial statements and decision making by stakeholders. Bothoftheseaccountingstandardssupportsinensuringreliability,transparency, understandability and comparability of financial information.
REFERENCES Turlington, J., Fafatas, S. and Oliver, E. G., 2019. Is it US GAAP or IFRS? Understanding how R&D costs affect ratio analysis.Business Horizons,62(4), pp.427-436. Buesa, A., Población García, F. J. and Tarancón, J., 2020. Measuring the procyclicality of impairment accounting regimes: a comparison between IFRS 9 and US GAAP. Kouki, A., 2018. IFRS and value relevance: A comparison approach before and after IFRS conversion in the European countries.Journal of Applied Accounting Research. Cussatt, M., Huang, L. and Pollard, T. J., 2018. Accounting quality under US GAAP versus IFRS: the case of Germany.Journal of International Accounting Research,17(3), pp.21- 41. Anantharaman, D. and Chuk, E., 2020. So Similar, yet So Different: Comparing the US GAAP andIFRSExperienceatElicitingGreaterTransparencyonPensionAsset Disclosures.Available at SSRN 3646842.