There are significant differences between the U.S. accounting system and the international accounting system. The U.S. system is driven by GAAP (Generally Accepted Accounting Principles), while other countries follow IFRS (International Financial Reporting Standards) and IAS (International Accounting Standards). The U.S. GAAP is monitored by the FASB (Financial Accounting Standard Board) and efforts are ongoing to create a common meeting ground for the GAAP with IFRS. The convergence process will take a long time and even then there will be big differences between how reports are read in the U.S. and elsewhere.
Difference between GAAP and IFRS
There are several important differences between GAAP and IFRS. These should be taken under advisement when reading financial reports.
IFRS standards are specified by the IASB (International Accounting Standards Board), which has incorporated the IAS (International Accounting Standards). The U.S. GAAP system is governed by the FASB (Financial Accounting Standards Board).
IFRS requires comparative financial statements to be specified during financial presentations, while there is no requirement as such in GAAP, though it’s desirable.
IFRS balance sheets follow standards set in IAS 1, while U.S. GAAP follows standards set in SEC Regulations. There are significant differences between what is considered a liability and an asset and there are differences in how to present that information.
Profit and Loss
There are two main categorizations in IFRS, which are the function of expenses and the nature of expenses, while there is no such categorization in the GAAP statement. In IFRS, profit or loss may need to be reintegrated into the income statement, while in GAAP that is applicable to amounts related to post-retirement benefits and pension.
Statements of Changes in Equity
In IFRS, a statement of recognized income and expense (SORIE) is required as a primary statement, while in GAAP the comprehensive income may be presented along with the financial statement.
Cash Flow Statements
In IFRS, there no exemptions while preparing a cash-flow statement. In GAAP, the cash flow statement contains exemptions for pension plans and employee benefit plans.
In IFRS, an operation is recognized as being discontinued when it qualifies for being “held for sale” and when it has been disposed of by the parent entity. In GAAP, these two qualifications are valid, but additional qualifications are also considered, like if the cash flow and operation flow of the discarded operation have disappeared from the parent entity and if the child entity does not continue to have a significant involvement in the operations of the parent entity.
The other major differences are beyond the scope of this article. Some of them include differences in the definition, presentation, and classification of accounting policies; assets; liabilities; financial instruments; income and expenditure; group accounts; associates; joint ventures; equity method investees; and matters like government grants, segment reporting, and foreign currency translation.
Is GAAP Limited to the U.S.?
GAAP is actually present in all countries, in that they follow a certain set of rules unique to that country. But most of these rules are not very different from the rules followed by companies in other countries, and these rules influence each other all the time.
This article was written by Richard Craft, an MBA student who looks forward to sharing more of his business knowledge so you can get a better understanding of how businesses work. He writes this in promotion of the accounting jobs with moneyjobs.com. Check out their site today to learn more!