IFRS Vs US GAAP | 6 Major Differences You Should Know!

IFRS vs US GAAP Differences

If you’re investing in evolving markets, you must know about the world’s two chief accounting systems: Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) IFRS vs US GAAP. is used predominantly in the United States, even though the Security and Exchange Commission is looking to shift to IFRS by 2015, the system used in the European Union and many other countries. Many countries have their own accounting systems, though most follow one key system or the other as they work to retain their markets modern with the help of IFRS vs US GAAP

All accounting schemes follow double-entry practices that classify transactions as revenue or expenses, assets or liabilities. The two crucial accounting systems have a few dissimilarities between them that may distress the results. If you understand a petite about both IFRS vs US GAAP, you can make a superior evaluation of numbers from companies that follow neither system.

International Financial Reporting Standards (IFRS) are considered as a common global language for business matters so that company accounts are comprehensible and comparable athwart international boundaries. They are a consequence of rising international shareholding and trade and are predominantly vital for companies that have transactions in numerous countries. They are gradually switching the many diverse national accounting standards. The guidelines to be followed by accountants to keep books of accounts which are similar, understandable, dependable and pertinent as per the users internal or external.

The mutual set of accounting principles, standards, and procedures that companies use to assemble their financial statements. GAAP is a blend of authoritative standards (set by policy boards) and merely the usually accepted ways of recording and reporting accounting information.

Objectives of GAAP

Financial reporting must provide information that is:

• Beneficial to present to potential investors and creditors and other users in making a lucid investment, credit, and other financial decisions.
• Helpful to present to probable investors and creditors and other users in evaluating the amounts, timing, and uncertainty of future cash receipts about economic resources, the claims to those resources, and the variations in them.
• Useful for carrying out financial decisions.
• Supportive in making long-term decisions
• Useful in refining the performance of the business
• Useful in keeping records
• Basic concepts

IFRS vs US GAAP differences

Few of these variances are likely to cause major fluctuations in any company’s reported results; a company with prodigious results under GAAP won’t look awful under IFRS, unless it got those results with an extraordinary item, which is an event that doesn’t occur on a regular basis such as a merger or a corporate restructuring. And because extraordinary items are disclosed, someone looking at the financial statements would be able to make the adjustment easily.

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THE IMPACT OF IFRS vs US GAAP CONVERGENCE

The Sarbanes-Oxley Act, the SEC acceptance of international standards, and the economic and financial collapse in recent years have been applying pressure on a number of countries, together with the United States, to eliminate the gap between the International Financial Reporting Standards (IFRS) and the U.S. Generally Accepted Accounting Principles (GAAP). Such initiatives have consequences on the world of accounting diversity, and the standards convergence of the U.S. GAAP along with the IFRS largely impacts corporate management, investors, and stock markets, accounting professionals and accounting standards setters.

The Consequences of Initiatives on Worldwide Accounting Diversity

Financial Reporting

Financial reporting standards and requirements differ by country, which makes variations in financial reporting. This problem turns out to be more widespread for investors trying to categorize accounting reporting differences when they are making an allowance for providing funding to capital-seeking companies that trail the accounting standards and financial reporting of the country in which they are undertaking business with the help of IFRS vs US GAAP.

Impact on Corporate Management

Corporate management will profit from modest, efficiency standards, rules, and practices that smear to all countries and are followed worldwide. The change will manage to pay for corporate management the opportunity to raise capital via lower interest rates while sinking risk and the cost of doing business.

Impact on Investors

Investors will have to re-educate themselves. The procedure will offer more reliable information and will be abridged without the necessity for change to the standards of the country. More, the new standards will intensify the international flow of capital.

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Impact on Stock Markets

Stock markets will see a decrease in the prices that go with entering foreign exchanges and all markets obeying the same rules and standards will further permit markets to contest internationally for global investment prospects.

Impact on Accounting Professionals

The modification and merging of the recent standards to internationally accepted ones will force accounting professionals to learn the new standard and will lead to steadiness in accounting practices.

Impact on Accounting Standards Setters

Once standards have come together, the actual method of developing and applying new international standards will be unpretentious and will remove the dependence on agencies to improve and sanction a decision on any definite standard.

Arguments for and Against the Convergence of International Accounting Standards

Arguments for the convergence are (a) renewed clarity, (b) possible simplification, (c) transparency and (d) comparability between different countries on accounting and financial reporting. This will result in an increase of capital flow and international investments, which will further reduce interest rates and lead to economic growth for a specific nation and the firms with which the country conducts business. Timeliness and the availability of uniform information to all concerned stakeholders will also conceptually make for a smoother and more time-efficient process. Additionally, new safeguards will be in place to prevent another national or international economic and financial meltdown.

Arguments against accounting standards convergence are (a) the unwillingness of the different nations involved in the process to collaborate based on different cultures, ethics, standards, beliefs, types of economies, political systems, and preconceived notions for specific countries, systems, and religions; and (b) the time it will take to implement a new system of accounting rules and standards across the board.

The Quality of International Accounting Standards

The Securities and Exchange Commission’s (SEC) goals and efforts both domestically and internationally have been to consistently pursue the achievement of fair, liquid and efficient capital markets, thus providing investors with information that is accurate, timely, comparable and reliable. One of the ways the SEC has pursued these goals is by upholding the domestic quality of financial reporting as well as encouraging the convergence of the U.S. and IFRS standards.

Research indicates that firms that apply the international standards show the following: a higher variance of net income changes, a higher change in cash flows, a significantly lower negative correlation between accruals and cash flows, a lower frequency of small positive income, a higher frequency of large negative income and higher value relevance in accounting amounts. Additionally, these firms have fewer earnings management, more timely loss recognition and more value relevance in accounting amounts compared to domestic (U.S.) firms following the GAAP. Therefore IFRS vs US GAAP firms adhering to the IFRS generally exhibit higher accounting quality than when they previously followed the GAAP.

The Bottom Line

Regardless of documented research signifying a higher accounting excellence experienced by firms that either follow the IFRS or swapped to the IFRS from the GAAP, there is a qualm and concern from the FASB (Financial Accounting Standards Board) regarding the application and carrying out of principle-based standards in the U.S. A key may be that the IFRS should agree to take some FASB standards to accommodate the needs of the U.S. constituents and stakeholders.

Although the merging efforts made on financial performance reporting, it seems that the main problems lie with the difference in the method of the U.S. GAAP and IFRS. The IFRS is more vibrant and is constantly being revised in response to an ever-changing financial environment.

It’s anyone’s estimate how this convergence will grow and influence the accounting profession in the U.S. From a legal viewpoint, companies will be required to reveal qualitative and quantitative information about contracts with customers, as well as a maturity analysis for contracts spread out beyond a year, as well as the addition of any noteworthy judgments and changes in judgments made in applying the proposed standard to those contracts. Maybe the solution lies in the need to think through a more in-depth study and an analysis of the factors persuading the molding or development of a country’s accounting system. so this is the IFRS vs US GAAP differences

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