IFRS A -Difference Between GAAP and IFRS and Implications of Potential Convergence

A major difference between GAAP and IFRS is that GAAP is rule-based, whereas IFRS is principle-based.


Key Points

    • Another difference between IFRS and GAAP is the methodology used to assess an accounting treatment. Under GAAP, the research is more focused on the literature whereas under IFRS, the review of the facts pattern is more thorough.
    • The convergence of accounting standards refers to the goal of establishing a single set of accounting standards that will be used internationally to reduce the differences between US GAAP and IFRS.
    • Convergence is also taking place in other countries, with "all major economies" planning to either adopt the IFRS or converge towards it, "in the near future".





Term

  • convergenceThe act of moving toward union or uniformity.



    

GAAP vs. IFRS

Principles Based vs. Rules Based

A major difference between GAAP and IFRS is that GAAP is rule-based, whereas IFRS is principle-based.

With a principle based framework there is the potential for different interpretations of similar transactions, which could lead to extensive disclosures in the financial statements. Although, the standards setting board in a principle-based system can clarify areas that are unclear. This could lead to fewer exceptions than a rules-based system.

Another difference between IFRS and GAAP is the methodology used to assess an accounting treatment. Under GAAP, the research is more focused on the literature whereas under IFRS, the review of the facts pattern is more thorough.

Some Examples of Differences Between IFRS and U.S. GAAP

  • Consolidation — IFRS favors a control model whereas GAAP prefers a risks-and-rewards model. Some entities consolidated in accordance with FIN 46(R) may have to be shown separately under IFRS.
  • Statement of Income — Under IFRS, extraordinary items are not segregated in the income statement. With GAAP, they are shown below the net income.
  • Inventory — Under IFRS, LIFO cannot be used, but GAAP, companies have the choice between LIFO and FIFO.
  • Earning-per-Share — Under IFRS, the earning-per-share calculation does not average the individual interim period calculations, whereas under GAAP the computation averages the individual interim period incremental shares.
  • Development costs — These costs can be capitalized under IFRS if certain criteria are met, while it is considered as "expenses" under U.S. GAAP.


Convergence

The convergence of accounting standards refers to the goal of establishing a single set of accounting standards that will be used internationally, and in particular the effort to reduce the differences between the US Generally Accepted Accounting Principles (US GAAP), and the International Financial Reporting Standards (IFRS). Convergence in some form has been taking place for several decades, and efforts today include projects that aim to reduce the differences between accounting standards.

The goal of and various proposed steps to achieve convergence of accounting standards has been criticized by various individuals and organizations. For example, in 2006 senior partners at PricewaterhouseCoopers (PwC) called for convergence to be "shelved indefinitely" in a draft paper, calling for the IASB to focus instead on improving its own set of standards.

Convergence is also taking place in other countries, with "all major economies" planning to either adopt the IFRS or converge towards it, "in the near future. " For example, Canada required all listed entities to use the IFRS from January 1, 2012, and Japan permitted the use of IFRS for certain multinational companies from 2010, and is expected to make a decision on mandatory adoption in "around 2012. "

The Globe

IFRS is Global

Implications of Potential Convergence

The growing acceptance of International Financial Reporting Standards (IFRS) as a basis for U.S. financial reporting represents a fundamental change for the U.S. accounting profession. Today, approximately 113 countries require or allow the use of IFRS for the preparation of financial statements by publicly held companies. In the United States, the Securities and Exchange Commission (SEC) has been taking steps to set a date to allow U.S. public companies to use IFRS,and perhaps make its adoption mandatory.

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