Revenue Recognition Differences Between New And Old Standard About Presentatio IFRS Versus GAAP

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IFRS Versus GAAP

There are two sets of accounting rules adopted for international use: US standards called Generally Accepted Accounting Principles (GAAP) and international standards known as International Financial Reporting Standards (IFRS). The first is developed by the Financial Accounting Standards Board (FASB), which derives its authority from the US Securities and Exchange Commission (SEC). The second is developed by the International Accounting Standards Board (IASB), an independent London-based accounting standard-setting body. Although GAAP and IFRS have some similarities in the presentation of their financial statements, they do not agree on all issues. Differences exist in the reporting and classification of items on income statements and balance sheets between the two sets of rules.

Unlike the more detailed GAAP-based standard, the IFRS-based standard is generally simpler in its accounting and disclosure requirements. The Statement of Profit and Loss is a required statement under IFRS as it is under GAAP and is known as the Statement of Comprehensive Income. The IFRS statement of comprehensive income is similar to that used by GAAP; however, there are several differences when comparing the two income statements.

Income statement presentation under GAAP is in a single-step or multi-step format. However, IFRS does not mention a single-stage or multi-stage approach. Under IFRS, entities must classify costs either by their nature (such as cost of materials used, direct labor, advertising costs, depreciation and amortization costs, and employee benefits) or by their function (such as cost of goods sold, selling expenses, and administrative costs). Although GAAP does not have this requirement, the SEC requires a functional presentation. While GAAP defines operating income, IFRS does not recognize this key measure. In addition, extraordinary items are prohibited by IFRS; while under GAAP, entities must report extraordinary items if they are unusual in nature and infrequent. The portion of profit or loss attributable to a non-controlling interest (or minority interest) is disclosed separately in the IFRS statement of comprehensive income. In addition, while IFRS specifies some minimum items that must be presented in the statement of comprehensive income, GAAP has no minimum information requirements. However, the SEC has stricter presentation requirements.

Balance sheet presentation is a requirement of both GAAP and IFRS. The most obvious difference is that IFRS refers to this statement as a “statement of financial position” rather than a balance sheet. Statement of financial position accounts are classified in accordance with IFRS, which means that similar items are grouped together to obtain meaningful interim results. In addition, the IASB indicates that parts and subsections of financial statements are more informative than the whole; as a result, the IASB discourages the reporting of summary accounts per se (eg total assets, total liabilities, etc.). Unlike GAAP, IFRS current assets are generally listed in reverse order of liquidity. For example, according to IFRS, cash is considered last. In addition, most companies under IFRS present current and non-current liabilities as separate classifications in their statements of financial position, except in areas where the presentation of liquidity provides more useful information. It is important to note some key differences in balance sheet reporting items between GAAP and IFRS.

In the current assets section, inventories are valued differently under IFRS. The use of (LIFO) “last in first out” is prohibited by IFRS. Also, unlike GAAP, when inventory is written down at the lower of cost or market, it may be reversed in a subsequent period up to the amount of the prior write-down under IFRS. In addition, IFRS allows property, plant and equipment and intangible assets to be revalued and reported as other comprehensive income.

IFRS uses different terminology in the equity section of its statement of financial position. For example, share capital is the nominal value of the issued shares. It includes common stock (called common stock) and preferred stock (called preferred stock). A share premium in the equity section of IFRS is the excess of paid-up amounts over par value.

The main problem caused by the inconsistency associated with the presentation of financial statements between GAAP and IFRS is the lack of uniformity. This problem creates difficulties in comparing financial statements between GAAP and IFRS. As a result, it makes sense for U.S. companies with foreign subsidiaries to switch to IFRS to facilitate stakeholder comparisons and afford access to global capital markets. However, the transition to IFRS may not be beneficial for small US firms; conversion will result in additional costs that may outweigh the benefits.

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