What is ifrs and gaap
Is IFRS That Different From U.S. GAAP?
The U.S. is moving toward IFRS. Unlike what happened with other countries, IASB and FASB have been working on convergence for many years. Are the two standards still very different?
December 15, 2008
by Remi Forgeas
For many years, countries developed their own accounting standards. They were rules-based, principle-based, business-oriented, tax-oriented … in one word, they were all different. With globalization, the need to harmonize these standards was not only obvious but necessary.
By the end of the ’90s, the two predominant standards were the U.S. GAAP (Generally Accepted Accounting Principles ) and IFRS (International Financial Reporting Standards). And, both standard setters, IASB (International Accounting Standards Board ) and FASB (Financial Accounting Standards Board ), initiated a convergence project even before IFRS was actually adopted by many countries.
Now, that the U.S. is clearly moving toward IFRS, as re-emphasized by the recent SEC (U.S. Securities and Exchange Commission ) proposal, one wonders what the potential impacts of the differences between these two frameworks on the financial statements will be? And how financial executives can anticipate the adoption of IFRS in order to minimize the last-minute adjustments?
In September 1999, the FASB published its second edition of an IASC-U.S. Comparison Project. a comprehensive comparative study of IASC (International Accounting Standards Committee) standards and GAAP. This 500-page report included comparative analyses of each of the IASC's "core standards" to their GAAP counterparts. At that time, conceptually and practically, the differences between the two frameworks were numerous and significant.
Since 1999, the FASB has undertaken six initiatives in order for the GAAP to converge with IFRS:
- Joint projects conducted with the IASB (Conceptual Framework Project, Business Combination Project, Revenue Recognition Project, Financial Statements Presentation),
In November 2008, SEC issued its proposed roadmap to the adoption of IFRS for public companies. This proposal came about one year after the ending of the reconciliation to GAAP for foreign registrants that issue IFRS financial statements. These two initiatives revealed the importance of international standards and concluded, to a certain extent, about 30 years of convergence between the two standard setters.
Once the convergence effort is acknowledged and its results identified, are both standards still different?
Principles Based vs. Rules Based
One of the major differences lies in the conceptual approach: U.S. GAAP is rule-based, whereas IFRS is principle-based.
The inherent characteristic of a principles-based framework is the potential of different interpretations for similar transactions. This situation implies second-guessing and creates uncertainty and requires extensive disclosures in the financial statements.
In a principle-based accounting system, the areas of interpretation or discussion can be clarified by the standards-setting board, and provide fewer exceptions than a rules-based system. However, IFRS include positions and guidance that can easily be considered as sets of rules instead of sets of principles. At the time of the IFRS adoption, this led English observers to comment that international standards were really rule-based compared to U.K. GAAP that were much more principle-based.
The difference between these two approaches is on the methodology to assess an accounting treatment. Under U.S. GAAP, the research is more focused on the literature whereas under IFRS, the review of the facts pattern is more thorough.
However, the professional judgment is not a new concept in the U.S. environment. The SEC is addressing this topic in order to find the right balance between the “educated” professional judgment, that is acceptable, and the “guessed” professional judgment.
Differences Between IFRS and U.S. GAAP
While this is not a
comprehensive list of differences that exist, these examples provide a flavor of impacts on the financial statements and therefore on the conduct of businesses.
- Consolidation — IFRS favors a control model whereas U.S. GAAP prefers a risks-and-rewards model. Some entities consolidated in accordance with FIN 46(R) may have to be shown separately under IFRS.
How to Anticipate the Transition?
Companies have a tendency to focus their attention on the accounting and financial statements impacts of the transition to IFRS. However, this process has had a much broader impact than expected.
As a first step, the transition phase has to be segregated from the going-forward application of IFRS. A reconciliation approach (i.e. identification of differences and work only on those) may be effective for the transition (less time, less cost), but going forward, this approach may create a lot of unexpected difficulties, since the tools will not be in place.
Some of the questions to consider before the start of the project are:
What will be the consequences on your company or organization?
The Finance department will obviously have to update its processes, as will Operations. which will face potential impact on how contracts are written or how the information is gathered and maintained; and Human Resources. which will have to review the compensation packages, especially when linked to business performances.
What will be the impact on management reporting and IT?
The transition to IFRS will imply a change in management reporting and, in some cases, in the format of data required. For example, systems will have to be upgraded in order to gather information on liquidity risks in accordance with IFRS 7 — Financial Instruments — Disclosures. Likewise for R&D costs, your company will have to define procedures to enable the gathering and review of costs related to development that may be capitalized.
When will changes have to be looked at?
Long-term transactions should be looked at with the “IFRS lenses.” If a company intends to enter into a joint-venture agreement, it should review the potential IFRS accounting in order to avoid unexpected results at the time of the transition.
Companies can leverage on the convergence process by implementing new pronouncements as soon as possible, especially those that are aimed to converge with IFRS, such as SFAS 141(R) on business combinations or SFAS 160 on the accounting for non-controlling interest.
When should the IFRS training begin?
Due to the broad impact of the transition, your company should put in place a scalable training plan on IFRS not limited to the accounting department, even before the actual transition.
Experiences in other countries, especially in Europe, show that the process is more complex and lengthier than anticipated. However, since European countries were the first ones to make the transition, they were unable to leverage lessons learned from predecessors in the transition process and most of the time local accounting standards were not converging to IFRS. U.S. companies can learn from the mistakes of its European predecessorsSource: www.cpa2biz.com