Question

. Based on your reading in Chapter 2 and 3 the following differences are common between financial statements prepared under U.S. GAAP compared to those prepared in other countries: Nature of accounting diversity Format • Terminology Recognition Rules (notes to financial on revenue, how do they recognize revenue) Measurement Rules (how do they recognize inventory) Instructions Identify at least one difference in each of the above areas. .

Answer 1

DIFFERENCE BETWEEN US GAAP AND OTHER COUNTRIES (WE FOCUS ON IFRS)

Nature of accounting diversity

  GAAP is considered to be rules-based, meaning rules are made for specific cases and do not necessarily represent a larger principle. IFRS is principles-based and, in that way, more consistent. According to the American Institute of Certified Public Accountants, the greatest difference between the IFRS and GAAP is "that IFRS provides much less overall detail." Other significant differences include how comparative financial information is presented, how the balance sheet and income statements are laid out, and how debts are treated

Format

Here are 2 key format differences between GAAP and IFRS.

The Cash Flow Statement

A company’s cash flow statement is also prepared differently under GAAP and IFRS. This is most acutely seen in how interest and dividends are classified.

GAAP prescribes that interest paid and interest received should be classified as operating activities, while international standards are a bit more flexible. Under IFRS, a firm can choose its own policy for classifying interest based on what it considers to be appropriate. Interest paid can be placed in either the operating or financing section of the cash flow statement, and interest received in the operating or investing sections.

The same goes for dividends. GAAP specifies that dividends paid be accounted for in the financing section, and dividends received in the operating section. When following IFRS standards, companies have a choice of how they categorize dividends. Dividends paid can be put in either the operating or financing section, and dividends received in the operating or investing section.

The Balance Sheet

The way a balance sheet is formatted is different in the US than in other countries. Under GAAP, current assets are listed first, while a sheet prepared under IFRS begins with non-current assets.

The two standards also dictate different approaches to ordering categories on the balance sheet. GAAP calls for accounts to be listed in the order of liquidity—or how quickly and easily they can be converted to cash. The items are arranged in descending order (most liquid to least liquid): current assets, non-current assets, current liabilities, non-current liabilities, and owners’ equity.

Under IFRS, the order is reversed (least liquid to most liquid): non-current assets, current assets, owners’ equity, non-current liabilities, and current liabilities.

Terminology

GAAP

The GAAP is a set of principles that companies in the United States must follow when preparing their annual financial statements. The measures take an authoritative approach to the accounting process so that there will be minimal or no inconsistency in the financial statements submitted by public companies to the US Securities and Exchange Commission (SEC). This enables investors to make cross-comparisons of financial statements of various publicly-traded companies in order to make an educated decision regarding investments.

IFRS

The IFRS is a set of standards developed by the International Accounting Standards Board (IASB). The IFRS govern how companies around the world prepare their financial statements. Unlike the GAAP, the IFRS does not dictate exactly how the financial statements should be prepared, but only provides guidelines that harmonize the standards and make the accounting process uniform across the world.

Recognition rules

Recognition of revenue

With regards to how revenue is recognized, IFRS is more general, as compared to GAAP. The latter starts by determining whether revenue has been realized or earned, and it has specific rules on how revenue is recognized across multiple industries.

The guiding principle is that revenue is not recognized until the exchange of a good or service has been completed. Once a good has been exchanged, and the transaction recognized and recorded, the accountant must then consider the specific rules of the industry in which the business operates.

Conversely, IFRS is based on the principle that revenue is recognized when the value is delivered. It groups all transactions of revenues into four categories, i.e., the sale of goods, construction contracts, provision of services, or use of another entity’s assets. Companies using IFRS accounting standards use the following two methods of recognizing revenues:

• Recognize revenues as the cost that can be recovered during the reporting period
• For contracts, revenue is recognized based on the percentage of the whole contract that has been completed, the estimated total cost, and the value of the contract. The amount of revenue recognized should be equal to the percentage of work that has been completed.

Measurement rules

Inventory Accounting Differences

GAAP allows LIFO carrying cost of inventory accounting, while the IFRS explicitly prohibits any company from using LIFO. Instead, international standards dictate that the same cost formula must be applied to all inventories of a similar nature.5

Under GAAP, inventory is carried at the lower of cost or market, with the market being defined as current replacement cost, with some exceptions. Inventory under IFRS is carried at the lower of cost or net realizable value, which is the estimated selling price minus costs of completion and other costs necessary to make a sale.5

Other inventory differences include how markdowns are allowed under the retail inventory method or RIM, and how inventory write-downs are reversed