U.S. GAAP standards are more focused on practical application in different accounting situations compared to IFRS standards, contain more recommendations developed for specific accounting issues, and leave less room for interpretation. In general, the accounting principles and reporting forms of these financial reporting systems are largely the same. Accordingly, a specialist preparing reporting under IFRS can quite easily switch to U.S. GAAP standards (James, 2010).
Moreover, the reporting itself, prepared according to some standards, can, under certain conditions and necessary adjustments, be transformed into others. The purpose of this paper is to analyze some of the differences between IFRS and U.S. GAAP standards and outline the procedures necessary for the transition from one accounting principle to another. It will help professionals with a single reporting system identify areas to learn and improve when moving to other reporting standards.
The preparation of reports according to international standards and according to GAAP standards is carried out in one of two ways. The first is the maintenance of parallel accounting, the second is the implementation of transformation entries in the statements prepared under national standards (James, 2010). Although many organizations decide on the implementation of parallel accounting by developing additional programs and modifying existing systems, the second method is the most common.
The main differences between U.S. GAAP and IFRS can be divided into three categories by the level of difficulty (James, 2010). They include changes in the presentation of already available information, reporting correction, carried out by additional calculations, and changes in reporting based on new analytical information.
In case of the adoption of IFRS, the company’s management should be familiar with several changes. According to IFRS standards, preparation of statements is required for two years. While IFRS permits incomplete reporting for the previous period, U.S. GAAP allows for only full reporting (James, 2010).
Management should know that the process of preparing reports for periods before the reporting period can be technically complex and costly. The audibility of such reports can cause doubts on the part of auditors, especially concerning items requiring real-time control procedures, such as inventories of fixed assets and material balances.
Unlike IFRS, U.S. GAAP permits accounting for a non-controlling interest in a company and does not require reporting contingent liabilities at the acquisition date if the probability of an actual liability is less than 50% (James, 2010). In practice, the principles of consolidation under IFRS and U.S. GAAP practically coincide; except in some cases, differences between standards do not significantly affect the consolidation.
Besides, considerable attention should be paid to discontinued operations, namely activities that, due to external reasons or a decision of the management, will be terminated in the foreseeable future. Compared to IFRS, U.S. GAAP sets more stringent disclosure requirements for discontinued operations (James, 2010). Their main purpose is to properly inform investors about the upcoming changes in activities and rights to assets.
U.S. GAAP requires R&D expenses to be written off as they are implemented. However, capitalization of some of the costs of software development is permitted. According to U.S. GAAP standards, development costs are reflected within operating activities, while in IFRS, within investment activities. IFRS allows the effect of an expected change in legislation to be taken into account when it is unavoidable (James, 2010). U.S. GAAP prohibits accounting for the impact of such changes prior to their entry into force.
IFRS contains rare comments on accounting principles applied in various industries. This role is assigned by IFRS to the regulators of individual countries. U.S. GAAP contains a large number of comments on accounting in various fields, including modern ones, such as Internet commerce.
The issues of convergence of reporting standards are among the key topics of interest to the international community. The term “convergence” is used to refer to the merging of national standards with the International Financial Reporting Standards (IFRS) (James, 2010). The convergence of accounting requirements is one aspect of the globalization of investment and financial infrastructure in general. In this regard, the process of convergence of U.S. GAAP and IFRS is of interest, in particular, the recent initiatives of the IASB and the FASB as a joint project to unify the standards (James, 2010). According to the FASB, the successful convergence of standards is the basis for the adoption of IFRS as the basis for the reporting of US public companies.
To create various corrections and modifications between IFRS and U.S. GAAP, the FASB has issued the FAS 141R for business combinations and FAS 160 for non-controlling interests in consolidated financial statements. They were aimed at simplifying the convergence of accounting and reporting standards. The FAS has established the rules for accounting for assets that change owners because of the fusion of enterprises or businesses.
The revised FAS 141R and FAS 160 standards are the results of joint work of the FASB and the IASB (James, 2010). FAS 141R substantially changes the accounting for business acquisitions and has an impact on the financial statements both at the acquisition date and thereafter. FAS 160 changes the accounting and reporting of minority interests. Minority interest is transferred to non-controlling interest and is classified as a component of equity.
Control without majority voting rights is of particular importance; thus, a special attention should be paid on the issue of specific purpose entities (SPE). They serve a strictly limited purpose and operate in the interests of another enterprise as a sponsor. In 2009, FASB adopted FAS 166 standards that eliminate the concept of SPE by the IFRS authorities (James, 2010). Following these standards, companies assess specific purpose entities for possible consolidation.
In FAS 167, however, SPE was introduced to give a knowledge of the beneficiary who can direct activities of the SPE. These new standards change the accounting for the securitization of financial assets and specific purpose entities, which implies that the largest changes in reporting affect banks and not only them.
FAS 166 requires more extensive disclosures than the previous rules (James, 2010). FAS 167 specifies a new procedure for determining whether to capitalize an associated company that is either undercapitalized or not controlled by a parent (James, 2010). The order of determination depends on the extent to which the subsidiary is able to influence the economic activities of the parent company.
IFRS standards provide transparency of financial reporting, although they do not intend to stimulate or, on the contrary, discourage long-term investments of any particular type. The goal of IFRS is to maintain stability and transparency in the financial world. This allows businesses and individual investors to make expert financial decisions as they can see exactly what is happening to the company they want to invest in.
The countries that benefit the most from the standards are those that invest in international business. The global implementation of IFRS will save money on alternative comparative costs and will also allow for more freedom to transfer information. It is beneficial for both companies and investors to use this system since the latter are more likely to invest in a company if its business practices are transparent.
Reference
James, M. L. (2010). Accounting for business combinations and the convergence of International Financial Reporting Standards with U.S. Generally Accepted Accounting Principles: A case study. Journal of the International Academy for Case Studies, 16(1), 95-108.