Free Essay Sample: Differing Positions Moving from US GAAP to IFRS

Introduction

Multiculturalism and diversity add massive value to the global environment. Due to the presence of different perspectives on business and finances among individuals from various cultures, sharing the known ideas creates ground to make a suitable decision on topics. As such, the global environment ends up filled with productivity and quality services from individuals. Currently, there is an outgrowing discussion on moving from the US GAAP (Generally Accepted Accounting Principles) to IFRS (International Financial Reporting Standards) (VanderPal, 2014). The US GAAP involves the accounting standards that the United States adopted in securities exchange required for use by accountants in every public company located in the state when compiling financial statements. IFRS are accounting standards/principles put in place by the International Accounting Standards Board (IASB) to help provide required data through global financial reporting (Edel, 2014). Also, the IFRS foundation helped the IASB to issue the IFRS accounting standards. Besides, when well used, IFRS accounting standards can boost the development and success of many public companies worldwide changing the field of business. In this paper, while delving deep into the value of multiculturalism and diversity in a global environment in association with companies shifting from using the US GAAP to using IFRS, there are similarities and differences between GAAP and IFRS. Information is also present on the advantages and disadvantages of adopting IFRS specific to the stockholder’s equity section of the balance sheet.

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Similarities and Differences between GAAP and IFRS

There are many similarities and differences between GAAP and IFRS, identifying their potential in fostering the success of companies. First of all, both GAAP and IFRS have a similar structure that guides/directs their functioning. The structures help both of them to identify, balance, and satisfy their accounting objectives, qualitative traits, and fundamentals. Secondly, to ensure there is balance in accounting within a company, both GAAP and IFRS use a balance sheet, a statement of cash flows, and an income statement. The balance sheet for IFRS and GAAP has its content specific to the stockholders’ equity section concerning disclosing types of stock, issuing shares, the par values, and authorized shares (Edel, 2014). As such, all parties involved with the finances of a company can easily track records to ensure that the profitability levels are increasing and to satisfy the set terms with stockholders. Thirdly, both GAAP and IRFS base their preparation of financial statements on an accrued basis since they recognize revenue when realized. In that, there is a recording of accounting earned income and acquired expenses in an organization. The primary differences between IFRS and GAAP are present in the statement of cash flows, the balance sheet, and the revaluation of assets. Therefore, looking at the statement of cash flows, GAAP identifies that paid dividends require accounting in the financial section while the operation section records details of received bonuses.

In contrast, when dealing with interests and dividends as handled by the IFRS, companies have grounds to select their categorization depending on their view of what is appropriate. Under the IFRS, interest is payable in the financial/operating section similar to paid dividends while received dividends are in the operating/investing section. The formatting structure of a balance sheet in the US is different from the way other countries structure a balance sheet. The difference in the GAAP and IFRS balance sheets is primarily in the organization of the assets (Liu et al., 2014). For that reason, the IRFS lists assets in the balance sheets from those that are the least liquid to the most liquid assets. That is, non-current assets come first followed by current assets, owners’ equity, non-current liabilities, and current liabilities. On the other hand, the organization of the GAAP balance sheet is the reverse of the IFRS. Such that, the current liabilities are at the top of the list then non-current liabilities, owners’ equity, existing assets, and non-current assets come last. Assets revaluation is the difference between IFRS and GAAP; hence, asset value reduction due to technology/market leads to a company’s loss on impairment. However, in case the cause of an asset’s value depreciation faces extermination, the value of the asset can highly increase. The standards of GAAP do not allow recognizing the value of an asset after the loss on impairment. In comparison, the rules of IFRS allow the revaluation of specific holdings after a loss on impairment based on adjustment for depreciation and readjustment to the initial cost.

Three Advantages and Disadvantages of Adopting IFRS

Adopting IFRS in a company has both advantages and disadvantages. Easy management of the balance sheet to ensure the stockholders’ equity section helps manage stocks and shares increasing returns on equity, having similar accounting standards worldwide, together with increased flexibility in accounting practices are advantages of adopting IFRS (Mardiniet al., 2019). The need for the entire world to adopt IFRS for its effectiveness is a disadvantage involved with its adaptation. Also, the presence of vast flexibility in the IFRS is deemed to cause standard manipulation concerns; thus, companies can hide existing financial issues while fraudulent cases increase (Tuzarová & Mejzlík, 2018). Another disadvantage involves the absence of equal profitability advantages among all businesses since small businesses will have to adopt IFRS leading to increased costs. Since large business already has IFRS, the companies will attain massive profits.

Conclusion

In summary, multiculturalism and diversity add value to the global environment through the introduction and presence of the US GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards. Shifting from companies using the US GAAP to IFRS has various similarities and differences. Similarities between GAAP and IFRS include a similar structure, usage of a balance sheet, a statement of cash flows, and an income statement, together with the use of an accrual basis to prepare financial statements. The differences between IFRS and GAAP center on cash flows, the balance sheet, and in the revaluation of assets. Easy management of balance sheets to increase equity, similar accounting standards within companies worldwide, and vast flexibility within accounting practices are the advantages of adopting IFRS. The disadvantages of choosing IFRS include a lack of equal profitability among businesses, standard manipulation issues, and the effectiveness of using IFRS is only present if the entire world adopts IFRS.

References

Limus, E. (2014, August 31). The similarities and differences between the financial reporting standards in United States. GAAP versus IFRS | Global Journal of management and business research. Global Journal of Management And Business Research. https://journalofbusiness.org/index.php/GJMBR/article/view/1406

Liu, C., Yip Yuen, C., J. Yao (posthumously), L., & H. Chan, S. (2014). Differences in earnings management between firms using us gaap and ias/IFRS. Review of Accounting and Finance, 13(2), 134-155. https://doi.org/10.1108/raf-10-2012-0098

Mardini, G. H., Wadi, R. S., & Mah’d, O. A. (2019). Empirical evidence of the suitability of IFRS in emerging markets. Accounting Research Journal, 32(4), 553-567. https://doi.org/10.1108/arj-04-2017-0065

Tuzarová, S., & Mejzlík, L. (2017). The IFRS assessment by publicly traded companies. The Impact of Globalization on International Finance and Accounting, 341-346. https://doi.org/10.1007/978-3-319-68762-9_37

VanderPal, G., & Ko, V. (2014). An overview of global leadership: Ethics, values, cultural diversity and conflicts by Geoffrey VanderPal, victor Ko :: SSRN. Search eLibrary :: SSRN. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2959323