The accounting practice in the United States is administrated by the Generally Accepted Accounting Principles (GAAP), which are considered to be largely founded on rules. At the same time, the majority of other countries in the world apply International Financial Reporting Standards (IFRS). IFRS is conceptually deemed more principle-based than GAAP (Kimmel, Weygandt, & Kieso, 2013). Therefore, it is considered more consistent and easier to apply than GAAP. Whereas the two sets of standards have closely similar financial elements and definitions, there exist fundamental technical differences between them. Some of these differences are evident in stipulations for formats of financial statements and revenue recognition.
Formats of Statement of Financial Position and Balance Sheet
IFRS does not stipulate a specific classification of items in a statement of financial position, and management has discretion to use personal judgment to determine the form of presentation in most instances. Companies that adhere to this standard usually make distinct classifications in terms of current assets and non-current assets, and, similarly, for current liabilities and non-current liabilities, except in situations where the presentation on the basis of liquidity is considered to increase the relevance and reliability of information. In such situations, assets and liabilities are presented in the order of degree of liquidity. IFRS defines the minimum items to be included in a statement of financial position (Ernst and Young, 2012). On the other hand, balance sheet items under GAAP are generally presented in the decreasing order of liquidity. The details of a balance sheet should be adequate to facilitate the identification of material items (Ernst and Young, 2012).
IFRS and GAAP do not differ in the aspect of the objectivity of financial reports. The viewpoints of the two standards are similar. According to both standards, financial information should have the qualities of relevance and faithful presentation in order to allow proper decision-making by the users of financial reports (Shamrock, 2012).
Ordinary Share Capital is the term employed by IFRS to refer to a common ownership stake of a company. The term is synonymous to “common stock” used under GAAP. IFRS’s statement of financial position is the equivalent term for a balance sheet used under GAAP.
Adoption of IFRS in the United States
A transition from the long-standing GAAP to IFRS would be a challenging task for the United States. In the event that the SEC elects to pursue this transition, it would require to present convincing benefits for the US corporations, because switching to a new set of regulations would require billions of dollars as additional expenses to modify the existing accounting systems. In addition, huge costs would be incurred in the sphere of workforce retraining. Furthermore, the SEC must consider investor protection. IFRS should be capable of shielding investors from corporate fraud, which is a fundamental role of the SEC (Ernst and Young, 2012). Therefore, the SEC would need to weigh the prospective benefits of changing from GAAP to IFRS against the inherent costs.
Material differences exist between IFRS and GAAP with regard to the recognition of revenues, though there are many similarities in this regard as well. Both standards require revenue to be recognized at fair value. However, IFRS permits a discounted present value to signify fair value in more instances than GAAP (McEwen, 2009). Further, under both IFRS and GAAP, the percentage of completion is mandatory unless the estimates are not reliable. Under GAAP, if the requisite estimates of percentage of completion cannot be relied on, the completed contract technique, which requires revenue to be recognized only when the contract is significantly complete, is used. However, IFRS does not allow the use of the completed accounting technique. If the estimates of the percentage of completion are not dependable, revenues are recognized only for the contract costs that will possibly be recouped, and all costs associated with the contract are expensed as incurred (McEwen, 2009).
Definitions of Revenues and Expenses under IFRS
Under IFRS, the term revenue encompasses the aggregate amount of economic benefits derived from the ordinary operating activities of an organization. Consequently, the definition of revenue does not cover non-operating gains. Similarly, the definition of expenses under IFRS excludes losses incurred from non-operating activities (Shamrock, 2012).
Sarbanes Oxley Act of 2002
The SOX of 2002 has competitive implications for US companies. It establishes a number of extensive and strict reporting and internal control requirements for publicly traded organizations. American companies incur heavy costs in complying with the act’s provisions. However, the act has been able to deter corporate frauds, reduce risk for investors, and foster foreign direct investments (Kimmel, Weygandt, & Keiso, 2013). The result is the stability of the financial system, which is in the best interests of companies.
In conclusion, IFRS and GAAP have identical theoretical bases. Nevertheless, technical differences exist in areas such as the format of financial statements and revenue recognition. Both IASB and FASB have declared efforts to converge differences between the two standards. The change from GAAP to IFRS would require the assessment of the benefits and costs of the undertaking.