Running head: GAAP VERSUS IFRS 1

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1 Running head: GAAP VERSUS IFRS 1 GAAP versus IFRS Student s Name Institution

2 GAAP VERSUS IFRS 2 GAAP versus IFRS Both Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) are the global preeminent financial reporting frameworks. There are, however, significant dissimilarities between the two. Despite some existing arguments for the U.S. GAAP superiority (Van der Meulen et al, 2003), there are benefits associated with converting from GAAP to IFRS. Nevertheless, companies may encounter some problems and obstacles when changing the reporting of their financial statements to the IFRS system. As the phenomenon of globalization occupies the globe, the role of the GAAP becomes less relevant. The Securities and Exchange Commission (SEC), the deputy of the GAAP and the Financial Accounting Standards Board (FASB), recently alternated its preferences to support the IFRS and the International Accounting Standards Board (IASB), the deputy of IFRS. Thus, in 2007, the SEC extended the opportunity to report under IFRS to the U.S. issuers (Bratton et al, 2009). There are three important benefits U.S. corporations can obtain by converting from GAAP to IFRS. The first advantage of adopting a common set of financial reporting standards, and one of the most important ones is the faster, easier and stronger international business relationships. The universal adoption of IFRS can result in decreased cost of capital for the most reporting companies. The second benefit that will come from converting from GAAP to IFRS is the lower perceived accounting risk. Because the cost of capital is linked to the perceived risk of the investment, the low riskiness will allow the benefit of the low cost of capital. Finally, IFRS is widely believed to be, at minimum, much higher quality and thus, much more adequate to faster bring the economic advantages than GAAP (Epstein, 2009). There are four important financial reporting dissimilarities between the IFRS and U.S. GAAP. First one is concerned with the revenue recording. Contingent pricing and the revenue

3 GAAP VERSUS IFRS 3 recording models factoring is different under IFRS and under GAAP. Revenue recording under the U.S. GAAP system stands primarily on the standard of the fixed pricing. This leads to recording the contingent amounts as the actual revenue only after this contingency is calculated. In turn, IFRS focuses primarily on the ability to reliably measure the revenue in question by gauging the probability of the potential economic advantages associated with the flowing of transaction to the organization. This leads to the conclusion that the revenue is recorded must faster and earlier under the IFRS system. Hence, in this case, IFRS will be more beneficial for the U.S. organizations than GAAP. Second difference between the two frameworks concerns the expense recording. IFRS assumes a liability for cash settled awards being recorded based on the instrument fair value. GAAP may not even allow for such liability to be recorded at all. Thus, IFRS is more advantageous because the expense recording occurs faster and more reliably. The third difference between IFRS and the U.S. GAAP concerns the assets. Under the IFRS system more unlisted equity securities investments are recorded at the fair value. In this case, GAAP is more beneficial in use because the fair value is not always reliably measurable once the reasonable fair value range estimates is significant. Finally, the fourth difference between the two frameworks concerns the liabilities. GAAP is more deliberate than IFRS in terms of reimbursements admission of the losses by requiring them to be practically definite of realization. Hence, with regards to the better refund rights, GAAP is more advantageous than IFRS ( IFRS and US GAAP, 2013). There are three problems that may be encountered by the U.S. corporations when converting their statements to IFRS. First, the creation of the IFRS balance sheet may require the information reviewing and calculations that has not been required under GAAP before. Second, IFRS consolidation standards significantly differ from the ones under GAAP. These

4 GAAP VERSUS IFRS 4 dissimilarities may cause some corporations either to consolidate organizations previously not consolidated under the U.S. GAAP or to deconsolidate some organizations. Third, several IFRS standards allow corporations to choose between various alternative policies. Sometimes, companies may miss this opportunity as it was not previously available under GAAP. There are three techniques that can enable corporations to overcome these obstacles. First, a company must plan its transition in advance and identify the crucial dissimilarities between the two reporting frameworks so that all of the necessary information is collected early. Second, previously excluded subsidiaries from the consolidated financial statements should be consolidated in a way similar to the first-time adopters assuming the same day as the parent. Corporations must also consider all the potential investee data gaps to comply with IFRS disclosure requirements. Finally, companies can select the accounting policies that must be recorded in the balance sheet. Corporations must use this opportunity in order to closely evaluate the IFRS accounting policies. They also need to take the chance to learn all of the available IFRS accounting policies ( IFRS and US GAAP, 2013). One of the long-term conversion issues on accounting for leases by the lessees is that IFRS does not offer specific requirements unlike the U.S. GAAP that has regulations associated with the real estate lease. The other long-term conversion issue for leases by the lessees is that almost all of the sale-leaseback transactions lead to sale-leaseback accounting. This results in removing the sold property item from the balance sheet, and once the leaseback is considered to be an operating lease, the property item would never appear on the seller-lessee s balance sheet ( IFRS and US GAAP, 2013). The argument to support the FASB position on accounting for leases is that it provides stronger control and more detailed guidance when the lessee is involved during the process of asset construction.

5 GAAP VERSUS IFRS 5 Despite some flaws associated with the IFRS framework and the very process of the adopting this standards, there are apparent advantages that come from the choosing IFRS over the U.S. GAAP. IFRS is believed to have superiority over the GAAP primarily because of its good quality reporting standards. There is also empirical research evidence that supports the notion that the uniform financial reporting standards under the IFRS and specifically in the conditions of globalization will lower the transaction costs, raise the market liquidity, ease the formation of international capital and decrease cost of capital (Epstein, 2009). This essay covered several questions regarding the dissimilarities, benefits and the importance of converting the financial statements of the U.S. companies from the U.S. GAAP framework to IFRS.

6 GAAP VERSUS IFRS 6 References Bratton, W. W., & Cunningham, L. A. (2009). Treatment Differences and Political Realities in the GAAP-IFRS Debate. Virginia Law Review, 95(4), Retrieved from Epstein, B. J. (2009). The Economic Effects of IFRS Adoption. The CPA Journal, 9. Retrieved from 09.pdf IFRS and US GAAP: similarities and differences (2013). PriceWaterhouseCoopers, IFRS readiness series. Retrieved from Van der Meulen, S., Gaeremynck, A., & Willekens, M. (2003). Attribute Differences Between U.S. GAAP and IFRS Earnings: An Exploratory Study. KU Leuven Association research, 43. Retrieved from