Accepted Accounting Principals

The US Generally Accepted Accounting Principals (GAAP) and the International Financial Reporting Standards (IFRS) are the accounting rules or standards developed by the professional accounting bodies to be followed by the accountants in the preparation of the financial statements. The IFRS are developed by the International Accounting Standard Board (ISAB), a standard making arm composed of fourteen members drawn from different continents. For the standard to be approved, it must be supported by eight members and above during an IASB due process (IASCF, 2006).

The two running standards developed by the ISAB committee include the International Accounting Standards (IAS) series and the IFRS series are the most known standards applicable in most countries unlike the GAAP which is only applicable in South Africa and United States. Of late, the world has rapidly headed towards these two main financial reporting standards-US GAAP accounting mostly used by large parts of global economy and the IFRS (the benchmarked system used by most countries.

The two accounting standards have been known to have disparities in the manner in which they are used in the preparation of the financial statement thereby rising a controversy if the convergence of the two systems will be worth to facilitate the provision of high quality financial statements, harmonize the interpretation of financial statement and facilitate the development of accounting globally (Abhi10 2009).

Currently, there is a slow convergence of the two standards to have a single set of the standards by the end of the year 2011 so as to provide a high quality global standard, to raise confidence of investors in making their sound decision and to ensure international mobility of professionally qualified accountants. The differences arise when the IFRSs are issued and revised on June 2004 by the ISAB members during a convergence project.

These differences include the classification of liabilities, financial instruments, accounting changes and asset exchange brought up by the new IFRSs or the IAS amendments and the discontinuing operations, assets held for sale and the provisions brought up by FASB. Other differences include; the treatment of the inventories, accounting policies, assets held for disposal, research and development costs and the interim financial reporting (Delotte 2004).

Therefore, the impacts of accounting changes caused by this convergence or IFRS adoption will have wide implications in the financial statements as shown. For example, the adoption of the IFRS has an implication on the long-term contracts and financial agreements in that if a company specifies a certain debt/equity ratio, it will change once the convergence standards gets in operation.

Besides, the operating leases may need to be accounted for as assets and liabilities thus significantly changing the financial statement’s presentations. Unlike the US GAAP, the preparation of the IFRS balance sheet required the calculation or the collection of the information. When using the US GAAP, revenue is recognized when earned and when realized or realizable, meaning that is should not be recognized until an exchange transaction takes place.

While the use of IFRS, recognizes revenue when either goods are sold, when services have been rendered, when the entities’ assets are used or when contracts are constructed. This means that revenue is recognized when there is a probability of future economic benefit flowing into the organization associated with such transactions. When the deliveries have been made or services rendered, the US GAAP emphasizes that revenue associated with contingencies should not be recognized not unless the contingencies have been resolved.

While the IFRS recognizes this, arguing that in the process of the transaction as sale of goods, the entity has already transferred the risks and rewards to the buyer, the amount of revenue can reliably be measured, there is a probability that future economic benefits associated with the transaction will flow into the organization, since the ownership has already been transferred, the entity has no managerial involvement and that the costs to be incurred can reliably be measured (pwc, 2009).

In the matters of sales revenue, the US GAAP abhors the use of percentage of cost of completion method of recognizing revenue unless the contract is within the scope of certain production contract. Meaning that, the standard acknowledges the application of the proportion performance model where revenue is recognized using straight line criterion or based on a discernible partner.

While IFRS requires that revenue be recognized using the percentage of completion method in service transactions using the straight line method. But if the service transactions cannot be measured reliably, revenue is recognized using a zero-profit model to the extent of recoverable expenses incurred. And if the transaction outcome is uncertain about the cost recovery, the revenue should be deferred until a more accurate estimate is made.