Comparing IFRS to GAAP

ComparingIFRS to GAAP

IFRSare those standards that were developed by the accountinginternational bodies so that the company accounts from any state canbe comparable and understood globally if they follow these standards.On the other hand, GAAP is the procedures and standards that governthe compilation of financial statements by companies globally.

FASBand IASB

Thesebodies work jointly to foster the implementation of the fair valuemeasurement, that is, the possible amount of that the financialinstruments should be sold currently. The first step, therefore, isto provide the information about the fair values in the notes sectionand secondly provide the fair market option which will be a guide forcompanies to use when valuing the financial instruments. They havealso stated what should be disclosed during the measurement. Bothboards work towards improving the IFRS and GAAP and also respondingto the global issues that arise due to the financial crisis. Thebodies believe that use of fair value to recognize the financialinstruments will make the financial statements of a company to bemore transparent and enhance its understanding of the users.

IASBsets the standards for IFRS, and it ensures that the financialstatements are prepared using the global standards that are qualityas well as ensuring that they are comparable and transparent. On theother hand, FASB sets the financial accounting and reportingstandards for the private sector. The financial reports are governedby these standards and the standards ensure that the economy runsefficiently by providing the users of these financial reports withcredible and transparent information.

Componentdepreciation and when it is used

“Componentdepreciation specifies that any significant parts of a depreciableasset that have different estimated useful lives should be separatelydepreciated” (Kimmel, Waygandt and Kieso 2011, p.500). Thisdepreciation is used where a firm realizes that the different partsof the asset have benefits which vary. There are those sections thatmay be considered more useful while others are less useful. Thevaried benefits of these parts of the asset will be useful whengenerating the tax deductions for the firm and, therefore, usablewhen computing the yearly tax return.

Revaluationof plant assets

Thisis the act of changing the values of a plant asset from the bookvalue to the fair value of the plant asset. Due to the change ineconomic conditions, the market value of the plant asset may bepositively or negatively affected. The market value may, therefore,increase or decrease depending on the nature of the economiccondition. Revaluation is used where the plant is to be recorded atcost. “According to the IASB, annual revaluation is necessary forthose items of property, plant and equipment which experiencesignificant and volatile changes in fair value” (Epstein andJermakowicz 2010, p.324)

Developmentexpense and development cost

Developmentcost is the amount paid to acquire an asset, and it can either be interms of cash or cash equivalents. On the other hand, developmentexpenses are those which result in a decrease of the economicbenefits which will end up reducing the value of an asset. Theseexpenses are the ones incurred while generating revenue from thatspecific asset. A company will have to decide how to classify thesecosts. Specifically, a firm will have to recognize the developmentcost in the financial statement while the development costs will berecognized in the income statement. By so doing, both costs will havebeen captured in the financial statement of the company.

Contingentliability

“Acontingent liability is a possible obligation that arises from pastevents and whose existence will be confirmed only by the occurrenceor non-occurrence of one or more uncertain future events not whollywithin the control of the enterprise” (Bhattacharyya 2012, p.75).This means that the obligation has not been recognized, or it may notbe possible to recognize it because it is not reliably possible tomeasure the amount attached to it. For instance, there can belitigation against a firm because of a wrongful act that has beencommitted by the firm or an agent of the firm, but the act isuncertain. Though the case may be in court, there can be apossibility that the firm will defend the case successfully and win.For example, the lawyer to a given firm may explain that the caseagainst the firm will be ruled by the competent court of law afterone year, and if the firm loses, the firm will be fined an amountranging from $5000-$10000. At this point, the firm is unsure of itspresent obligation because the decision depends on the ruling of thecourt.

Similaritiesand differences between GAAP and IFRS

Similarities

First,they both require that a firm should have a present obligation fromthe occurrence of past events to transfer cash benefits so thatrecognition of that provision will be made possible. Secondly, thetwo requires that the differed tax be recorded as either a profit orloss, not unless such recording was done initially outside the profitor the loss.

Differences

IFRSrequires that the recognition of variations in differed tax be interms of loss or profit not unless there is such a recording that wassuch recording before that was not done concerning profit or lose. Inthe case of GAAP however, the variations that due to any cause mustbe recorded as profit or loss regardless of whether the recognitionof deferred tax was outside the tax or loss.

Conclusion

GAAPand IFRS are internationally recognized and used. Though they mayhave differences in usage, they have similarities and, therefore careshould be taken while using the two.

References

Bhattacharyya,A. K. (2012). FinancialAccounting for Business Managers.S.l.: Phi Learning.

Epstein,B. J., &amp Jermakowicz, E. K. (2010). WileyIFRS 2010: Interpretation and Application of International FinancialReporting Standards.Hoboken, N.J: Wiley.

Kimmel,P. D., Weygandt, J. J., &amp Kieso, D. E. (2011). Accounting: Toolsfor Business Decision Making. Hoboken, N.J: John Wiley.