IFRS Vs. GAAP

IFRS vs. GAAP
Teddrick Smith
ACC/ 291
Professor Marlo
October 27, 2014

IFRS vs. GAAP In the world of finance recording, reporting, and responsibility for both are a few of the most important standards to uphold. These ideas or standards are recognized throughout the business world as a necessity to doing business properly. There are two groups or associations that have set up an all-inclusive list of these standards. They are Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS). These two groups of standards are similar in many ways and also very different. These similarities and differences are going to be discussed as well as component depreciation, revaluation
of plant assets, the difference between expenses and cost, and contingent liabilities. The FASB and the International Accounting Standards Board (IASB) are two separate entities with the same goal in mind. In efforts to set up a more universally accepted set of standards, the financial accounting standards board came together and signed what is known as the Norwalk Agreement. This agreement states that both parties of the FASB and IASB will work together on maintaining these standards and guidelines both mutually as well as effectively. Both groups agree that whichever board had the preferred standard the other board would accept and adopt this standard and to also put this standard into practice effective immediately. Furthermore, in situations where both groups standards could use improvement, both groups will work together to improve and change the existing standards (Ingram, 2014). An example of these two groups working together is the work being done and the steps taken towards a more universal way of fair value measurement. Together, the FASB and the IASB have accepted a slow and gradual method of measurement. Criticisms arise with the method of recording some of the financial instruments. According to some critics recording some assets at a fair value while recording others at amortized value creates a company of two opposing values (Kimmel, Weygandt, & Kieso, (2013). Component depreciation will be discussed in the section which follows. This section will discuss component depreciation and in what situations it must be used.
Component depreciation is a depreciation method that accounts for the separate depreciation figures for any part of an individual asset that can depreciate. This means that separate or individual components are to have a separate depreciation value from the main or principle asset. An example of this would be a construction company buying a new fork lift. This fork life is considered and recorded as an asset. The fork lift has many components that can wear out or break well before the fork life is in non-working order. The tires, hose, wire harnesses, and the engine are all examples of components that have a depreciation value aside from the value of the principle asset itself. The difference is the estimated useful life of the individual parts is what calls for the separate depreciation values or component depreciation. Under the International Financial Reporting Standards it is required to use the component method of depreciation. This method is used a lot less frequently under the Generally Accepted Accounting Principles (GAAP). The Revaluation of Assets will be discussed
following. When a company would like to make sure that its assets are still viewed at a fair value the company will have its assets appraised using Revaluation of Assets. When an asset is chosen for revaluation, all similar assets or all assets recorded in the same classification are also revaluated. Depending on the reason for revaluation the overall idea is to get the most use and value out of equipment or other like assets. Keeping this in mind, it would seem more financially beneficial to do a revaluation of assets done when the most valuable asset in the group or category is closest to its purchase date. This would mean that the depreciation value would still be fairly high because that asset has not aged much. Additionally, the wear and tear of regular usage would also be minimal. Expenses and costs can many times be confused but these aspects will be made more clearly next. Some project development expenditures are recorded as development expenses and some as development cost.
The difference between these two accounts is that an expense will be used during the day to day money raising activities that businesses do daily. Furthermore, a cost can be considered an expense as well except for the fact that it will not be reported as an expense if the value of the asset that was purchased will not depreciate. The purchase of land is a good example related to a cost. The cost or value of the land does not depreciate therefore it is recorded as a cost or in the cash account. It will be recorded as an asset because the value of the land can never be used up which is the case with expenses. An expense is usually money gone, not money invested. An expense almost never yields a return. An example of this would be a company purchasing a truck it intends on using for delivery purposes. Since the truck is going to be used for business, the value of the truck is recorded as an asset Truck on the balance sheet. Then, at some point the truck will be used to its maximum ability or is no longer functioning or irreparable. This is when the company scraps or salvages the truck and the truck is then recorded as a Depreciation Expense because the company will no longer get any use out of it. Contingent liabilities will be discussed in detail
following. Contingent liabilities are problem expenses or obligations that are not reported or recorded in the financial statements but will be recorded or reported if a certain amount of criteria are met. Threats of litigation are an example of a liability that could not have been foreseen or predicted and makes for a great example of a contingent liability. The IFRS refers to these types of liabilities as Provisions. These provisions are defined by the International Financial Reporting Standards and Kimmel, Weygandt, & Kieso (2013) as, “Liabilities of uncertain timing or amount” (pg. 565).

References:
Ingram, D. (2014). Annual Straight Line vs. Effective Interest Amortization. Retrieved from http://wiki.fool.com/Annual_Straight_Line_vs._Effective_Interest_Amortization
Kimmel, P., Weygandt, J., & Kieso, D. (2013). Financial Accounting . Hoboken, NJ: John Wiley & Sons.