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The creation of the Financial Accounting Standards Board (FASB) in 1973 has laid an internationally recognized foundation upon which the conceptual framework of the United States Generally Accepted Accounting Principles (U.S. GAAP) guides organizations on how to measure and report information on their financial statements (Spiceland et al., 2016). That same year, the International Accounting Standards Committee (IASC) was assembled to standardize global accounting standards; however, the IASC restructured itself as the International Accounting Standards Board (IASB) in 2001 and is structured similarly to FASB (Spiceland et al., 2016). The IASB also created new standards under their restructuring called the International Financial Reporting Standards (IFRS) (Spiceland et al., 2016), of which we’ll be comparing its standards with U.S. GAAP with regard to the balance sheet, or as it is called under IFRS, the statement of financial position.
Standards from U.S. GAAP and IFRS are largely analogous: basic elements of the balance sheet are presented logically; definitions of those elements are similarly stated, and; provided disclosure information enhance a user’s understanding of an organization’s financial position is philosophically similar. “Since the Norwalk Agreement of 2002, the FASB and IASB have issued many joint statements that are in almost all respects identical (Shamrock & Shamrock, 2012).” However, IFRS standards are more stringent than U.S. GAAP on how the statement of financial position should be organized.
IFRS outlines a minimum list of line items that should be presented on the face of the statement of financial position, while U.S. GAAP has no such minimum requirement (Spiceland et al., 2016). IFRS does not require that those line items be presented in any particular order, though organizations traditionally follow the order of assets, then liabilities, and then equity. Organizations following IFRS guidance, though not required, often will list non-current assets (liabilities) ahead of current assets (liabilities), while organizations following U.S. GAAP must list them in reverse fashion, with current assets (liabilities) listed first before non-current assets (liabilities) (Spiceland et al., 2016). IFRS does require the distinction of current and non-current assets/liabilities per IAS 1.66-76 within the statement of financial position, “except when a presentation based on liquidity provides information that is reliable and more relevant (Grant Thornton LLP, 2018).”
Business segment reporting is another area where IFRS and U.S. GAAP are similar to one another, with IFRS differing in the requirement of total liabilities disclosure of operating segments (Spiceland et al., 2016). Similarities include “information about reported segment profit or loss, including certain revenues and expenses included in reported segment profit or loss, segment assets, and the basis of measurement (Spiceland et al., 2016).”
The Convergence Project is aiming to better align accounting standards between U.S. GAAP and IFRS. One area where both accounting standards converged regards lease standards for lessees. IFRS 16, Leases, was issued by IASB in January 2016 and requires that leases not only be stated on the statement of financial position by lessees but that all leases be treated as finance leases (Grant Thornton LLP, 2018). ASU 2016-02, Leases, was issued by FASB the following month, requiring the recognition of most leases on the balance sheet by lessees (Grant Thornton LLP, 2018). U.S. GAAP differs from IFRS, however, in that lessees will continue to distinguish leases as either capital or operating leases, which remains the same for lessors, but will now “focus on whether control of the underlying asset has transferred to the lessee to assess lease classification (Grant Thornton LLP, 2018).
It is important to note that the different international financial reporting standards can make it quite difficult for a financial statement user to adequately interpret the information presented by an organization of interest. U.S. GAAP is largely rules-based, while IFRS is principles-based and allows for some flexibility. This can make presenting, comparing, and understanding financial information quite difficult for the reader (Harris & Arnold, 2013). Converging international accounting standards with regard to financial statements can help various markets and users better recognize and avoid potential economic failure.
- Spiceland, J. D., Sepe, J., Nelson, M., Thomas, W. (2016). Intermediate Accounting (8th ed.). New York, NY: McGraw-Hill Education.
- Shamrock, S., & Shamrock, S. E. (2012). IFRS and US GAAP: A Comprehensive Comparison. Hoboken, NJ: Wiley.
- Grant Thornton LLP. (2018). Comparison between U.S. GAAP and IFRS Standards. Chicago, IL: Author.
- Harris, P., & Arnold, L. (2013). US GAAP Conversion To IFRS: A Case Study Of The Balance Sheet. Journal of Business Case Studies (Online), 9(2), n/a. Retrieved from http://search.proquest.com/docview/1418712556/
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