According to research, the US GAAP and the IRFS vary to some degree. These disparities can be due to a variety of factors. First, each company's board of directors has distinct priorities in mind when developing expectations. Second, each board's response to business structures varies, and third, the United States developed anti-abuse safeguards. Fourth, considering their apparent similarity, the discrepancies arose as a result of inconsistency in instruction on the standards' targets. Some of the areas where the differences between the two exist are impairment, measurement of given classes of asset, recognizing of non-financial assets, and expensing of costs related to research and development among others (Staff of the U.S Securities and Exchange Commission, 2012).
Both GAAP and IFRS have different impairment method in measurement and recognition of impairment losses.
Whereas IFRS methods allow for reversing of impairments to a given level in case there are signs that the impairment loss has reduced, GAAP rules out the possibility of such reversals.
Despite both IFRS and GAAP agreeing on recognition of some non-financial liabilities guided by the probability of a liability being incurred, they differ in defining of what is meant by probable.
While IFRS defines probable in regard to contingencies as what is more likely not to happen, GAAP defines it as future occurrences likely to happen. Therefore, GAAP is said to have a greater threshold for recognition of liabilities than IFRS. As a result of this, a liability is identified earlier in IFRS than in U.S GAAP. Further, any obligation for exit and disposal related costs under GAAP is identified in the same period as when they incur a liability while in IFRS costs can be recognized earlier.
IFRS and GAAP also differ in depreciating of plant property and equipment.
IFRS depreciates each part of an item separately just like an independent asset. By contrast, under GAAP all the parts are depreciated as one whole item.
U.S. GAAP expenses costs related to research and development as incurred.
Conversely, IFRS expenses costs related to research as incurred but capitalizes costs related to development that meet a given criteria. U.S. GAAP allows the last in first out (LIFO) methodology for stock while IFRS does not permit LIFO. This difference could lead to great effects on tax payable and also operating figures (Staff of the U.S Securities and Exchange Commission, 2012). On my opinion, the greatest difference of the two is the use of LIFO since it could lead to huge differences in operating income and tax. The most similar is the depreciation of PP&E since at the end of the day the depreciation figures could be similar. QUESTION TWO
Jurisdiction comparison
In order for investors to gain from a well-made accounting standard, a dependable and high caliber implementation was crucial. Comparing financial statements set up by IFRS and fully examining the intensity of these statements on an international basis. Assess the limit to which these statements negatively impact comparability practically and the way investors handle those situations (Beswick, 2013). Financial statements should be seriously explained in details so as to achieve transparency an as well as comparability.
Problems affecting comparability within and across the jurisdiction
One of the problems facing global comparison in regard to accounting standard is the lack of dependability in standards application. Accounting standards require important aspects, for example, a common language in order to be effectively delivered. Accounting professionals should be employed too and this will improve consistency internationally. Quality controls and firms come in handy in ensuring accounting standards of good quality are offered to investors and this will positively impact comparativeness in the jurisdiction (Staff of the U.S Securities and Exchange Commission, 2012).
Lack of adequate active regulatory
Lack of active regulatory has hindered comparativeness in a big way. Regulatory oversight can be a good reinforcement in developing of quality accounting and can also help in focusing audit standards based on investor's requirements. Close monitoring of IFRSs implementation by regulators can greatly help in addressing divergence and offering guidance will help in minimizing diversity.
Similarity among the jurisdictions
A major similarity between the two is that both IFRS and GAAP deal with cash and its equivalent the same way i.e. they make use of financial statements such as balance sheets and income statements. In addition, they both recognize revenue when it is realizable. QUESTION 3 Data on enforceability and auditability of IFRS was acquired through analyzing of factors influencing auditability of the financial statements under IFRS and their enforceability, looking at factors that may have influenced the consistency of auditing the statements and identifying changes that can lead to improvement of the consistence of the auditing and enforcement of financial statements under IFRS. The SEC paid attention to four major areas when analyzing, namely principles and rules, effects the structure of an audit firm on comparability, regulatory bodies both local and international, and enforcement and compliance (Staff of the U.S Securities and Exchange Commission, 2012).
Regulatory bodies
SEC noted that there exist bodies whose main aim is promoting continuous enforceability of IFRS's financial statements. Internationally, IOSCO is the recognized body while regionally bodies such as ESMA which has a role in increasing consistency among regulators of national securities of members of the EU are recognized. In addition, ESMA supports European Enforcers Coordination Session (EECS) which is a group that deals with accounting and convergence of enforcement in EU. The EECS publishes decisions on enforcement made by EU members using the no-name strategy in order to increase continuous enforcement of IFRS.
Compliance and enforcement
Research revealed that in addition to accounting standards, there are other factors affecting financial statement comparability. Factors such as jurisdiction enforcement structure, auditing, regulatory enforcement, and incentives on managers' reporting were also noted. They also established that enforcement structures differed greatly by jurisdiction. While some jurisdictions are governed by government-controlled security regulators, others are regulated by governmental bodies while others are governed by independent enforcers overseen by the government. This difference in structure may have an impact on the available enforcement mechanisms.
Firm's Structure Effects on Comparability
Under IFRS, large accounting firms are networks of independent member organizations, resulting in the lack of a top-down model for decision making. As a result of this, there is a possibility of member firms reaching own conclusions on a given transaction's accounting while the rest come to different conclusions. This is in contrast with U.S GAAP where a conclusion on accounting is applied consistently. In this regard, for large accounting firms to ensure that conclusions by the main IFRS reach all members and are followed, they have to apply very vigorous control procedures. Large firms can, therefore, improve inter-border comparability by improving their processes (Staff of the U.S Securities and Exchange Commission, 2012).
Rules versus Principles
Generally, there is a feeling that IFRS is more aligned to principles than to rules. Conversely, US GAAP is more rules-based. Also, IFRS permits greater flexibility than US GAAP which causes less enforceable standards. This inconsistency has also resulted in concerns about comparability as well as its impact on the auditability. Of all the four areas SEC identifies the use of different accounting practices as the major problem. This is because IFRS uses principle-based processes while GAAP rule-based which is stricter.
References
Staff of the U.S Securities and Exchange Commission. (2012).Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S Issuers [pdf file]. Retrieved from http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-final-report.pdf
Beswick, P. (2013). Rule-making preventing SEC from deciding on IFRS. Journal of Accountancy[pdf file]. Retrieved from fromhttp://www.journalofaccountancy.com/News/20139217.htm
