Good Essay About Ways In Which The Format Of The IFRS Financial Position Statement Differs From The GAAP Balance Sheet
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IFRS Versus GAAP
Accounting plays a pivotal role in the daily operations of businesses. Borrowed and earned monies, as well as other types of cash flows, require precise recording. Well-organized and proper accounting methods help the management and other stakeholders to monitor progress and make important decisions. This essay delves into the relevance, benefits, comparisons and contrasts of International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) as concepts in accounting practice.
One of the ways in which the IFRS differs from GAAP is that it does not necessitate the use of the title “statement of financial position”. Additionally, IFRS follows a different order from GAAP balance sheet in its financial statement format. The listing of Non-current assets, current assets and equity is done on the left side. Then non-current liabilities and current liabilities are on the right side in that order. Moreover, the IFRS requires a classified statement of the financial position of a company, except in very limited situations. Listing of the current assets is usually in the reverse order of liquidity for IFRS (Kieso et al., 2013 PowerPoint 1).
The GAAP balance sheet draws from the asset and liability accounts as well as the ending owner’s capital balance reflected in the owner’s equity statement (Weygandt et al., 2013 PowerPoint 3).
How the IFRS and GAAP conceptual frameworks differ based on the objectives of financial reporting.
IFRS conceptual framework is quite similar to that of GAAP. However, IFRS has simpler disclosure and accounting requirements than GAAP, which is more detailed. Further, the IFRS uses the monetary unit assumption, which majorly depends on the country of reference (Kieso et al., 2013 PowerPoint 2).
Terms commonly used under IFRS, which are synonymous with common stock and balance sheet
IFRS uses the term “ordinary share capital” for common stock. Stock is called “shares” in the investment category. Additionally, IFRS is increasing the use of fair value to report assets such as property, equipment and plant. The concept of fair value also applies, but in a limited way, to intangible assets and natural resources (Kieso et al., 2013 PowerPoint 2).
Issues that the SEC must consider in deciding whether the United States should adopt IFRS
The SEC must consider the long-term and short-term implications of IFRS to sole-proprietorships, partnerships, and corporations. In addition, SEC should conduct a cost and benefits analysis of adopting the IFRS in order to weigh their overall input to the USA businesses. Moreover, the SEC should consider the relevance and sustainability of IFRS in meeting business accounting needs of the US companies (Kieso et al., 2013 PowerPoint 2).
Compare and contrast the rules regarding revenue recognition under IFRS versus GAAP.
In GAAP, revenue recognition is based on the respective accounting period. Further, revenue recognition connects to the matching principle in which expenses pair with revenues during the same period in which efforts were made to generate revenues. All these form part of the time-period assumption (Weygandt et al., 2013, PowerPoint 3).
GAAP has close to a hundred rules for revenue recognition. In IFRS, revenue recognition solely lies on a single standard called IAS 18. On the other hand, GAAP uses terms such as realizable, realized (that is expected to be received or received) and earned as a basis for revenue recognition (Kieso, 2013, PowerPoint 4).
The definitions of revenues and expenses under IFRS includes gains and losses though differs significantly from GAAP in their terminology. IFRS permits the revaluation of items such as buildings and land. GAAP does not allow depreciation based on the revaluation of items (Kieso et al., 2013 PowerPoint 4).
The competitive implications (both pros and cons) of SOX
Effectiveness in accounting comes from sound and ethical practices. The US legislators enacted the Sarbanes-Oxley Act (SOX) of 2002 to help create more transparency in corporate accounting and thus restore investors’ confidence. For example, the Act requires top management to certify the probity of financial information, thus putting them to task to ensure that the information is accurate. Further, the Act increases the independence of the auditors, thus facilitating objectivity in financial reporting. Incidentally, the Act places higher penalties for fraudulent activities. Indeed this will help corporations to refrain from unscrupulous dealings. However, one main disadvantage of the Act is that it puts the top management at risk of allegations of fraudulent dealings even in situations where it was not their doing. In addition, the cost of complying with the SOX is quite high hence rendering most US security markets less competitive (Kieso et al., 2013 PowerPoint 1).
Financial accounting systems play a significant role in ensuring the profitability and sustainability of a business. As such, it is paramount for every business entity to have a clear and consistent financial accounting system that reflects accurate and real picture of the financial transactions and dealings. IFRS and GAAP place emphasis on business values that play a crucial role in the promotion of sound financial accounting practices.
Kieso, Kimmel & Weygandt. (2013). Financial Accounting: Tools for Business Decision Making (7th ed.). LA: John Wiley & Sons Inc. (PowerPoint 1 by Harmon C. Introduction to Financial Statements.)
Kieso, Kimmel & Weygandt. (2013). Financial Accounting: Tools for Business Decision Making (7th ed.). LA: John Wiley & Sons Inc. (PowerPoint 2 by Harmon C. A Further Look at Financial Statements.)
Kieso, Kimmel & Weygandt. (2013). Financial Accounting: Tools for Business Decision Making (7th ed.). LA: John Wiley & Sons Inc. (PowerPoint 4 by Harmon C. -Accrual Accounting Concepts.)
Kieso, Kimmel & Weygandt. (2013). Financial Accounting: Tools for Business Decision Making (7th ed.). LA: John Wiley & Sons Inc. (PowerPoint 5 by Harmon C- Merchandising Operations and The Multiple-Step Income Statement.)
Weygandt, Kieso & Kimmel (2013). In Accounting Principles (6th ed.). LA: John Wiley & Sons Inc. PowerPoint 3 by Bradford, M. Adjusting the Accounts.)
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