The Concept of the United States Generally Accepted Accounting Principles (GAAP).and International Financial Reporting Standards (IFRS).

The Concept of the United States Generally Accepted Accounting Principles (GAAP).and International Financial Reporting Standards (IFRS).

Introduction.

According to Tawiah (2015), International Financial Reporting Standards (IFRS) refers to a set of accounting standards which has been developed by the International Accounting Standards Board (IASB) which is used during the preparation of a company’s financial statements. These standards have gained a global perspective as it is used in both developed and the developing economies as a tool for gaining financial security. These standards also guide investors before they start any form of investment in any country. It is regarded as a common language in finance and accounting which makes it easy for company accounts to be easily understood globally as well as making it easy for the financial information or records to be comparable across international boundaries (Buchman et al 2016).

These rules are followed by accountants in different countries in maintaining the books of accounts which needs to be comparable, easy to understand as well as the ability to provide reliable and relevant information for both external and internal uses. These standards were issued in the year 2001 by the international accounting standards board (Jung et al 2016). The Us generally accepted accounting principles (GAAP) refers to the standard frame work guidelines for financial accounting which are used in any given jurisdiction, normally known as the standard accounting practice held by all accountants and which has been developed in the US. Generally accepted accounting principles includes the standards applied by accountants in preparation of financial records, the conventions as well as the specified rules which are followed by accountants when recording, summarizing and preparing financial statements.

Difference between IFRS and US GAAP.

1. Area of coverage

The International Financial Reporting Standards (IFRS) have a wider coverage because they are used by more than one country. As defined by Dudin et al (2015), the IFRS have gained global recognition and therefore are used across the globe. On the other hand, the GAAS have a narrower coverage since their recognition is just centered within the United States of America.

1. Rules and principles

The IFRS are considered to be more of principles which guides accountants in the preparation of the financial statements. This is in contrast to the US GAAP which are considered to be more of rules governing the US financial markets. In addition, IFRS tries to capture the economics of business transactions as compared to the US GAAP (Watts 2015).

1. Inventory costs.

The US GAAP uses the Last- In- First- Out (LIFO) and the First -In -First- Out (FIFO) methods in carrying out accounting for inventory costs. In IFRS, LIFO method is not allowed whatsoever for the accounting for inventory costs. This has been agued by Giner (2016).

1. Treatment of intangibles

The treatment of intangible assets is different as applied in IFRS and the US GAAP. In IFRS, the intangible assets are treated as solid and which have the ability of gaining future benefits. They are therefore considered to be value based. In the united states GAAP, the intangible assets are considered to be of fair value and which do not attract future benefits.

1. Investment benefits,

Since the IFRS are accepted and recognized globally, they therefore attract international trade between different countries as many investors can chip in and apply those standards in operating their business in different parts of the world. On the other hand, the united states GAAP are usually limited in utilization just within the United states and therefore do not facilitate international trade (Jung et al 2016).

Finally, the IFRS are more robust and not subject to periodic adjustments. This s because they IFRS have been formulated by the international accounting standards board which calls for many shareholders for the to be altered (Watts 2015). On the other hand, the united states GAAP are only applied within a small geographical area hence can be changed easily.

Importance of IFRS and GAAP.

1. They define the different terms of trade.

The differences between the IFRS and the united states GAAP helps in defining the terms of trade in different countries. The terms of trade in those nations which use the IFRS are different than those of the Aus. This is due to the fact that the IFRS guides the accounting functions of different countries (Buchman et al 2016).

1. They assist in proper financial reporting.

These standards and rules enables accountants to properly prepare systematic records of financial information which can be reported easily especially to the board of directors. This because these rules and standards are bidding to many countries. They therefore lead to homogeneity in financial accounting.

• Importance to investors.

Investors in different sectors can read and understand accounting reports and financial reports prepared by accountants from different countries because they just follow the newly accepted accounting standards (Jung et al 2016). The credible information gained from there reports will guide them in making some investment decisions.

1. The US uses the GAAP in safeguarding her infant industries.

According to Buchman et al (2016), the he generally accepted accounting principles applied in the united states of America enables the country to safeguard its local industries and make them to keep on operating. This is because those rules are theirs and do not conforms to those of any other country.

1. Importance on accounting professionals.

These sure the groups of individuals who take part in making strategic accounting decisions. The convergence of the current standards to internationally accepted standards which will also lead to consistency in accounting standards.

1. They simplify the management functions.

The simple and streamlined standards, rules and practices which apply to all countries enables the corporate managers to match rate and return (Giner 2016). The globally accepted principles have a positive impact on interest rates to different countries which will encourage them to realize the value of their capital. This will consequently lead to a higher margin in their businesses as well as reduced cost of operating business even along the globe.

Implementation of accounting principles.

Buchman et al (2016) argued that the implementation of the IFRP and the GAAP has been stipulated by the Government Accounting Standards Board as a requirement for all states to prepare and maintain the state’s annual and financial statements which will afterwards used in the preparation of the annual budget. The law called for the conversion of accounting standards to GAAP which was authorized in a legislation enacted in the year 1993 which was discussed in details in the year 2008 in the united states of America General Assembly (Buchman et al 2016). The desire to change the accounting period was mortised due to the consideration of cost of accounting in different countries accounting methods used in different countries.

In the year 1993 which marks the conversion and the implementation of the Generally Accepted Accounting Principles, the Government Accounting Standards Board instructed the state to prepare annual financial statements as well as the annual budget at the beginning of July. 1995 (Giner 2016). The state accounting departments were required to prepare conversion plans so as to be in a position to implement the Generally Accepted Accounting Principles which were to be submitted to the appropriation committee in the year 1995. The process of implementing the GAAP however faced drawbacks due to continuous postponement as the years progressed (Watts 2015),

In order to promulgate the International Financial Reporting Standards, the London based international accounting standards board was as an independent accounting standard setter. It resulted in to setting of highly standards in accounting which were later ushered in the IFRS. It has gained its [popularity because over the past years, many companies have been expanding their businesses in to global oversees.

Regulation of accounting standards.

Regulation of accounting standards is the oversight which is directed on these standards. The regulation is undertaken or rather governed by the Financial Reporting Council (FRC) which replaced the Accounting Standards Board (Tawiah 2015). As the regulator of the accounting standards, the main mandate of the council is to ensure that the standards are not violated by any state and that a stern warning is taken upon any country which violates the principles governing those standards. This is because there is a need to make them remain robust. The Financial Reporting Council reports to the Codes and the Standards Committee.

Conclusion.

In conclusion, it is clear that the International Financial Reporting Standards (IFRS) and the United States generally accepted accounting principles (GAAP) are all international bodies which governs countries over a larger geographical area. The United States government has tried to enact its own principles so as to attain the interdependency of its accounting practice although the process has called for a massive integration between several committees which regulates the accounting process globally (Giner 2016). Also, many countries are using the international Financial Reporting Standards so as to realize a common benefit of reduced cost in the preparation and maintaining of financial statements.

References

Buchman, T. A., Harris, P., & Liu, M. (2016). GAAP vs. IFRS Treatment of Leases and the Impact on Financial Ratios.

Dudin, M. N., Prokofev, M. N., Fedorova, I. J. E., Frygin, A. V., & Kucuri, G. N. (2015). International Practice of Generation of the National Budget Income on the Basis of the Generally Accepted Financial Reporting Standards (IFRS).

Giner, B., Hellman, N., Jorissen, A., Quagli, A., & Taleb, A. (2016). On the ‘Review of Structure and Effectiveness of the IFRS Foundation’: the EAA’s Financial Reporting Standards Committee’s View. Accounting in Europe, 13(2), 285-294.

Jung, W. O., Park, S. O., & Chung, H. (2016). Debt financing and voluntary adoption of the international financial reporting standards: Evidence from Korean unlisted firms. Emerging Markets Finance and Trade, 52(1), 39-51.

Tawiah, V. K., & Benjamin, M. (2015). Conservatism analysis on Indian Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

Watts, R. L., & Zuo, L. (2016). Understanding practice and institutions: A historical perspective. Accounting Horizons, 30(3), 409-423.