IFRS versus GAAP

Introduction

The contemporary business world is a witness to the application of the two frameworks in relation to the preparation of the Financial statements of any specific organization. The one is International financial reporting standards (IFRS) and the other one is the Generally accepted accounting principles. It is worth considering that although the primary objective of the both of the frameworks is same, yet they have difference in terms of objectives and requirements. Financial statement is a key ingredient for the stakeholders for the making of the economic decisions regarding their interests. It is important to understand the differences in relation to both the frameworks which would lead to increased understanding of the financial statements prepared under the respective reporting framework.

The Jurisdictions of IFRS and GAAP

GAAP, the generally accepted accounting principles are the accounting standards that are set out by the Financial accounting standards board of the United States of America, however, the body that set out the International Financial reporting standards if the International accounting Standards board. IFRS has the objective of creating consensus in relation to accounting practices of the specific issues and thereby promoting the standardization, comparability of the financial reporting function around the globe. Securities exchange commission of the United States is considering to replace the GAAP with IFRS. The adaptation process requires the deliberations to create consensus among the stakeholders and yield benefits greater than the existing framework, GAAP.

Difference between the IFRS and GAAP

The following paragraphs will attempt to highlight the difference between the two reporting frameworks in terms of objectives and Requirements.

Format of Balance Sheet

The GAAP provides for the Balance sheet presentation requirements which emphasize the presentation of the line-items in liquidity order. The liquidity order requires that cash be reported as a first line-item as it is a liquid asset itself. IFRS does not specify specific classification criteria. The other portion of the balance sheet that is a little different is the Equity portion.  In accordance with the GAAP, the Equity is a last line item on the balance sheet, however, IFRS requires it to be presented above the section of the liabilities.

Objectives of the IFRS and GAAP

The primary objectives of the both frameworks is to protect the interests of the stakeholders by providing guidelines in relation to the preparation of the financial statements which are fair in content and spirit and thus lead the stakeholders in making of the decision in favor of the interests. GAAP set out different reporting requirements for the profit oriented organizations and the non-profit concerns. IFRS are principle based standards that have the objective of promoting the harmony in the accounting practices. GAAP requirements are rule based that serve the primitive purpose of the regulation of the Financial statement information presented in relation to the organizations.

Specific Terms in the Balance Sheet Under IFRS and GAAP

The formatting requirements with respect to both frameworks is a little different. However, major terminology is same in the Balance sheet prepared under the either framework. The terms Balance sheet and the common stock are exclusive terms used by the GAAP. The equivalent or synonymous terms for the both phrases in the IFRS are “Statement  of Financial position” and “Share Capital Ordinary”. IFRS used the term Financial position as it precisely defines the purpose of the statement of the financial position. The rationale behind the usage of the term Share capital ordinary is that it is used frequently in the continent of Europe and thus is a representative of a norm.

Application of the IFRS in United States

United States of America is the biggest economy of the world. The organization in the America are using the GAAP for the financial statements presentation since long. The adaptation of the new framework, that is IFRS, is an uphill task for SEC. For the adaptation of the new framework, the new framework must outweigh the existing framework in terms of benefits for the organizations as well as the stakeholders. SEC understands the expenditure of huge cost, overhauling of existing accounting practices in order to implement the new framework. Over and above, employee training, promulgation of the new regulations and up-gradation of the information system designs is compulsory to make the transformation successful.

Revenue Recognition, IFRS and GAAP

Over and above the difference in the formatting requirements, there is difference with respect to revenue recognition for different transactions. GAAP set out specific and exclusive regulation for specific industries, for example, real estate, information technology, manufacturing concerns. On the other hand, IFRS set out principle based rules for the revenue recognition for transactions such as provision of services, sale of goods, construction contracts. Table I will highlight the approaches undertaken under the respective frameworks.

Transaction	When Revenue will be Recognized?	GAAP approach	IFRS approach
Sale of Goods		The fee is quite determinable in addition to the delivery as per the covenants of agreement.	Revenue will be recognized when risk, rewards are transferred on the instance of the transaction to the buyer and there is reliability and certainty in relation to measurement of the revenue.
Provision of Services		If there is a possibility of the refund in relation to contract that has multi-phases, GAAP restricts the recognition of revenue owing to the failure of the completion of the later phases.	If there is a possibility of the refund in relation to contract that has multi-phases, IFRS permits the recognition of the revenue, however, the presence of the commercial substance is necessary.

Table I IFRS versus GAAP approaches to accounting treatments of the transactions

IFRS and the definition of the revenues and expenses

As per the provisions of the IFRS conceptual framework, Revenue is a term that is used with reference to the operating activities’ embedded economic benefits. There are many instances when the term that is “Gains” and “Loss” are part of the income statement but IFRS do not categorize them under the head of the revenue and expenses respectively as they are not the eventual outcome of the operational activities.

 Conclusion

The primary objectives of the both frameworks is to protect the interests of the stakeholders by providing guidelines in relation to the preparation of the financial statements which are fair in content and spirit and thus lead the stakeholders in making of the decision in favor of the interests. IFRS are principle based standards that have the objective of promoting the harmony in the accounting practices. GAAP requirements are rule based that serve the primitive purpose of the regulation of the Financial statement information presented in relation to the organizations. It is important to understand the differences in relation to both the frameworks which would lead to increased understanding of the financial statements prepared under the respective reporting framework.