International Financial Reporting Standards
International Financial Reporting Standards i.e. IFRS are developed as a general international language pertaining to business dealings in order that corporate accounts are clear and equivalent across global boundaries. However, Generally Accepted Accounting Principles i.e. GAAP is the most common accounting principles implemented by the Securities and Exchange Commission (SEC) of U.S.
Both on the board, FASB and the IASB have released new revealing summary intended at bridging the gaps between IFRS and U.S. GAAP regards to fair value accounting. Under the new Accounting Standards Codification System by FASB, accounting for fair value has been classified as Topic 820 i.e. Fair Value Measurement and Disclosures respectively. It also, followed by other pertinent provisions, presented a method for the determination of fair value of assets and liabilities by way of a hierarchy of inputs. Moreover, it requisite using valuation methodologies coherent with conventional techniques (income, market, and/or cost), and offered some fundamental guidelines for disclosure. On the other hand, the IASB released an exposure summary on Fair Value Measurement particularly in May 2009 and also released a final standard 2011 in this way.
After detailed emphasis by two boards, a final standard was prepared. This draft is a product of the long-lasting attempts by the FASB and the IASB to bridge the requirements for the measurement of fair value and for the disclosure of information pertaining to fair value measurements constant with both U.S (GAAP) and IFRS.
The objectives of both of the boards i.e. IASB and the FASB for issuing the proposed IFRS was to set up an isolated source of guidance for all the measurements pertaining to fair value essential or permitted by IFRS to lessen complications, to expand reliability in the application of these standards, to simplify the understanding of fair value and pertinent guidance to share the objective of measurement more clearly and to enhance disclosures relating to fair value to facilitate users of the financial statements to measure the degree to which fair value is exercised and to update the users about the elements used to originate those fair values. (theiia.org, 2014)
Component depreciation occurs when an asset is comprised of different parts based on which the depreciation is applied accordingly. As per IFRS, entities are entitled to apply component depreciation provided if the associated parts of the assets are expected to deliver dissimilar pattern of economic benefits. The main reason underlying this is that component depreciation provides a clear image of the book value of the entity’s assets. Under GAAP, the said method is also allowed, however it is rarely preferred by U.S companies. (octatutor.com, 2011)
The revaluation of the Plant assets is the process of change to the fair value of book value. The said process is obligatory in the condition that substantial changes have been occurring in the market value of the plant asset. Under IFRS, if an asset needs to be reevaluated then the entity is required to treat the rest of its assets as per the same method for valuation. Under US GAAP, revaluation of Plant, Property and equipment is not permitted. (mcgladrey.com, 2012)
Some product development expenditures are recorded as development expenses and others as development costs. Explain the difference between these accounts and how a company decides which classification is appropriate.
International Financial Reporting Standards
US GAAP require entity’s to expense all R&D i.e. research and development costs as operating expenses However, under IFRS, IAS 9 also compels the expensing out of research cost but permits the capitalization of the development expenditures. Development costs include all expenses and costs that are involved in transforming the research into commercial products.
A contingent liability is a potential commitment the occurring of which is dependent on the conclusion of a future based event. A contingent liability is reported in accounts provided the contingency is possible and the liability amount is reliably measurable.
For instance, a company might be facing litigation from a competitor for infringement of copy wrights/patent. If the legal department of the company estimates that the competitor holds the strong edge, and the damages are expected to be payable provided the plaintiff succeeds in the suit are $2 million, the company would record a contingent liability of $2 million on its accounts. However, if the legal department beliefs that the lawsuit is very improbable to be succeeded by the plaintiff, no contingent liability will be recorded (Investopedia.com, 2015).
The fundamental principles in both U.S. GAAP and IFRS are almost similar; however there are other slight differences. Regarding the balance sheet, the requirement of GAAP compels the reporting of liabilities to be made in class of liquidity, whereas the IFRS requirement is the reverse order of liquidity. Talking about the reporting of interest expenses, both of the effective interest rate method and straight method are permitted under GAAP, however, the effective interest rate method is allowed under IFRS. Moreover, there are special rules pertaining to contingent liabilities in IFRS, whereas there is no such requirement under GAAP.
There exist slight differences between U.S. GAAP and IFRS. Each of these has particular requirements pertaining to the recording of assets and liabilities, which can present in significantly different financial statements. Both of the IASB and FASB are mutually working in order to update the accounting regulations and principles with the variations in the developing business situations. Moreover, both of the systems have a great significance in maintaining high-level accounting standards globally.
- GAAP and IFRS: Reconciling Fair Value Measurements. (2014).
Retrieved from freeassignmenthelp.com.theiia.org/fsa/2011-features/gaap-and-ifrs-reconciling-fair-value-measurements/
- Attention Required! | (2011).
- McGladrey Home; U.S. GAAP vs. IFRS. (2012).
- Contingent Liability Definition | Investopedia. (2015).
Retrieved from freeassignmenthelp.com.investopedia.com/terms/c/contingentliability.asp
- blogs; Similarities and differences ,(2005). Pg 07-23.