Professor Cameo Christopher
Differences of International Accounting Standards: IFRS vs. GAAP
The recent financial crisis and the globalization of the world’s economy has brought an increased need for a single standard of financial reporting. According to Kimmel (2013), over “115 countries have adopted the International Financial Reporting Standards (IFRS) developed by the International Accounting Board (IASB).” The United States has adopted the Generally Accepted Accounting Principles (GAAP) developed through the Financial Accounting Standards Board (FASB). Both of these standards have the same spirit of reporting and this paper will discuss similarities and differences between the two standards.
The FASB and IASB want users of financial statements to have a clear and accurate picture of a company’s assets. Both principles require a company to disclose fair market value information in the notes section of the financial statement. Assets are reported at fair value or book value under both systems, but the fair value option permits but does not require companies to record some types of financial instruments at fair market values in the financial statements.
Component depreciation allows for the various parts of an asset to be depreciated separately if they have different useful lives. An example of component depreciation can be seen in the airline industry. An airplane airframe has a useful life of 40 years, while engine components have a useful life of 10 years and other components yielding only 5 years.
Annual Component Depreciation
According to Kimmel, “IFRS follows most of the same principles as GAAP in the accounting for property, plant, and equipment. There are, however, some significant differences in the implementation. IFRS allows the use of revaluation of property, plant, and equipment, and it also requires the use of component depreciation.” Component depreciation is rarely used under GAAP but is currently an accepted method. The revaluation of plant assets allows for the adjustment of value and is applied to all assets of the same class. “IFRS permits revaluation of intangible assets (except for goodwill)” while “GAAP prohibits revaluation of intangible assets” (Kimmel, 2013).
Some product development outlays are recorded as development costs and others as development expenses as learned under the course material. Under GAAP and IFRS, the cost incurred during the research phase is expensed. IFRS dictates that costs during the development phase are capitalized as Development Costs once a detailed design or a working product is in place. According to “Capitalizing software development costs- waterfall, agile and cloud” (2011) “Guidelines (under GAAP) don’t dictate whether companies have to capitalize or not, only the rules they have to follow if they decide to do so.”
The IFRS defines a contingent liability as “a possible obligation (asset) that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity (IAS 37.10)” (“Comparison between U.S. GAAP and International Financial Reporting Standards,” 2013 ). One example of a contingent liability for an auto manufacturer is a lawsuit from failure to recall a faulty part. The formation of a class action lawsuit may or may not happen depending on the circumstances but some estimate of potential damages