IFRS vs. GAAP
June 1, 2015
IFRS vs. GAAP
The International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP) are rules used to ensure ethical reporting of financial information. During Accounting 291, we have learned how to apply these rules however the differences between the United States GAAP and the IFRS make it difficult to compare companies. Some of these differences appear in the measurement of “fair value”, component depreciation, the revaluation of plant assets, product development expenditures, contingent liabilities, and the accounting for liabilities.
Moving to Fair Value Measurement
To the average ...view middle of the document...
IFRS permits the same depreciation methods (e.g., straight-line, accelerated, and units-of-activity) as GAAP. However, a major difference is that IFRS requires component depreciation. Component depreciation specifies that any significant parts of a depreciable asset that have different estimated useful lives should be separately depreciated. Component depreciation is allowed under GAAP but is seldom used” (Kimmel, 2013, Chapter 9, A Look at IFRS).
Revaluation of plant assets
As one would expect, the value of assets changes over time. While both the IFRS and GAAP both allow for the revaluation of plant assets, they differ in terms of intangible assets. “IFRS allows companies to revalue plant assets to fair value at the reporting date. If revaluation is used, it must be applied to all assets within the same class. Assets that are experiencing rapid price changes must be revalued on an annual basis. IFRS permits revaluation of intangible assets (except for goodwill). GAAP prohibits revaluation of intangible assets” (Kimmel, 2013, Chapter 9, A Look at IFRS).
Product development expenditures
“Research and development costs are expenditures that may lead to patents, copyrights, new processes, and new products. IFRS allows capitalization of some development costs. This may contribute to differences in research and development expenditures across nations” (Kimmel, 2013, Chapter 9, Intangible Assets). “As in GAAP, under IFRS the costs associated with research and development are segregated into the two components. Costs in the research phase are always expensed under both IFRS and GAAP. Under IFRS, however, costs in the development phase are capitalized as Development Costs once technological feasibility is achieved” (Kimmel, 2013, Chapter 9, A Look at IFRS).
Many are familiar with contingencies through shopping for houses. One may enter a contract for the purchase of a new home contingent on the sale of their current home. The same can be said for accounting. “Under GAAP, some contingent liabilities are recorded in the financial statements, others are disclosed, and in some cases no disclosure is required. Unlike GAAP, IFRS reserves the use of the term contingent liability to refer only to possible obligations...