While most analysts seem to be busy with the Euro-Crisis or Kim Kardashian’s divorce, there is some other news, albiet slightly less important. There is a good chance that the US will be switching from GAAP to IFRS. The SEC might be releasing the final decision in a little over 30 days from now. If you have not taken the CFA and only research US equities, you better start reading up. GAAP and IFRS are very different in some ways on all three financial statements.
Below are a few differences between GAAP and IFRS:
GAAP means general accepted accounting principles and IFRS means International Financial Reporting Standards. GAAP is used in USA as US GAAP. While International Financial Reporting Standards (IFRS) are principles-based standards, interpretations and the framework (1989) adopted by the International Accounting Standards Board (IASB). Following are the major difference between GAAP and IFRS.
1. Inventory Measurement
GAAP explains that inventory value is measured on the basis of FIFO, LIFO and weighted average method but IFRS does not allow to use LIFO method. We can not use last in first out for calculation the value of closing stock under IFRS.
2. Recognition of Revenue from Services
GAAP accepts the money as revenue when total services are provided and contract of services is completed. But if there is work is pending under service contract, we can not recognise the revenue from service. But IFRS allows to show the revenue even some part of services are pending. IFRS also use zero profit model in case if we can not be reasonably calculate the revenue.
3. Difference in Construction Contract’s Revenue Recognition
a) In GAAP : We can show the % of completed work and recognise its revenue on financial statements.
b) In IFRS : IFRS uses only revenue approach of % of completion method but it does not use the gross profit approach of % completion method.
SEC Releases Long-Awaited IFRS Comparison Papers:
The two documents, posted on the SEC’s Web site on Wednesday, are crucial steps in the SEC’s work plan for considering the possible incorporation of IFRS into the U.S. financial reporting system. The SEC commissioners are expected to issue a statement by the end of the year, and perhaps vote, on whether or not IFRS can be adopted by U.S. companies or whether the converged standards will be gradually endorsed, or “condorsed,” to make them part of U.S. GAAP.
In May, the SEC staff issued a paper describing a possible method of incorporating IFRS through endorsement (see SEC Releases Work Plan for How IFRS Transition Might Work). That was the first of the staff papers envisioned in the work plan. The staff papers are expected to help the SEC commissioners with their decision on whether to give the go-ahead to IFRS. The new papers showed that both sets of standards remain far apart in fundamental ways, and that IFRS is not applied uniformly around the world.
The first of the newly released documents, “A Comparison of U.S. GAAP and IFRS,” explores standard by standard how the two systems differ. It describes the status of the convergence efforts of the Financial Accounting Standards Board and the International Accounting Standards Board in aligning various standards as part of their memorandum of understanding and outside the MoU. For some of the more active projects, such as financial instruments, which are undergoing changes, the document omits comparisons.
The second document, “An Analysis of IFRS in Practice,” examines how a sampling of foreign companies have used IFRS in their filings with the SEC, and summarized areas that drew comments from the SEC’s Division of Corporate Finance as part of its disclosure review program. The SEC staff looked at accounting principles, presentation of financial statements, and accounting for assets, liabilities, shareholders’ equity, revenue, expenses, broad transactions, and certain industry-specific matters. The staff paid attention to matters such as transparency and clarity of disclosures, compliance with applicable accounting standards, and the comparability of financial statements.