Financial Statements Ifrs vs. Gaap

Topics: Balance sheet, Income statement, Generally Accepted Accounting Principles Pages: 5 (1606 words) Published: October 27, 2012
Financial Statements IFRS vs. GAAP
Kathrine D. Nepon
Strayer University
John Ware
ACC 401
November 27, 2011

For those in the business world, particularly in the accounting field, a major issue has surfaced in recent years relating to the differences between Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS). Currently, the majority of countries in the world follow International Financial Reporting Standards guidelines; however, the United States still uses GAAP. This topic has been a main focus because there is a plan for convergence between the two frameworks in the near future. The United States accounting system will undergo drastic changes when this occurs, but in the long-run the idea is to simplify the accounting procedures around the world. “Through these projects, some covering major components of the financial statements, the boards intend to improve financial reporting information for investors while also aligning US and international accounting standards. These projects are a significant move toward achieving a common accounting framework, a necessary step in the globalization of business and investment” (PriceWaterhouseCoopers LLP, 2011). The main difference between GAAP and IFRS is that GAAP is considerably rule-based, whereas IFRS is more principal-based which means IFRS has room for interpretation. The specific differences are far too many to cover in a short presentation, however, an explanation of some major differences are mentioned below.

While each framework requires prominent presentation of an income statement as a primary statement, there are some major differences in the way items are handled. The three main differences that this writer noticed are the actual format of the income statement, the handling of exceptional and also how extraordinary items are handled. First we will discuss the format changes. Under IFRS; there is no prescribed format for the income statement. The entity should select a method of presenting its expenses by either function or nature; this can either be, as is encouraged, on the face of the income statement, or in the notes. Additional disclosure of expenses by nature is required if functional presentation is used. IFRS requires, as a minimum, presentation of the following items on the face of the income statement: revenue, finance costs, share of post-tax results of associates and joint ventures accounted for using the equity method, tax expense, post-tax gain or loss attributable to the results and to re-measurement of discontinued operations and profit or loss for the period. Under US GAAP; presentation is in one of two formats. Either; a single-step format where all expenses are classified by function and are deducted from total income to give income before tax; or a multiple-step format where cost of sales is deducted from sales to show gross profit, and other income and expense are then presented to give income before tax. SEC regulations require registrants to categories expenses by their function. Amounts attributable to the minority interest are presented as a component of net income or loss. Next we have the differences in exceptional or significant items. Under IFRS; the separate disclosure is required of items of income and expense that are of such size, nature or incidence that their separate disclosure is necessary to explain the performance of the entity for the period. Disclosure may be on the face of the income statement or in the notes. IFRS; does not use or define the term ‘exceptional items’. Under US GAAP; the term ‘exceptional items’ is not used, but significant items are disclosed separately on the face of the income statement when arriving at income from operations, as well as being described in the notes. Third are extraordinary items. Under IFRS they are prohibited. Under US GAAP, these are defined as being both infrequent and unusual. Extraordinary items...

References: American Institute of Certified Public Accountants. (2011). AICPA IFRS Resources. Retrieved November 26, 2011, from IFRS:
PriceWaterhouseCoopers LLP. (2011). US GAAP & IFRS convergence. Retrieved November 26, 2011, from PWC:
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