IFRS and GAAP

Date:  2021-03-05 01:28:11
3 pages  (884 words)
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This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

According to Mackenzie et al., (2013) IFRS 8-1 standards commonly referred to as the IFRS 8 majorly highlight on the definition of the operating segments and their interactions. Under IFRS 8, an operating segment is defined as a component of an entity that primarily engages in a business entity from which it may obtain revenues and further incur expenses. In an effort to enhance fair value measurement, the standards stipulated that operating segments should undertake reporting of their financial and descriptive information if they meet the following qualifications. The standard applies in instances that the operating segments have reported revenue of 10 per cent or more of the combined revenue from the both external customers and intersegment sales.

The standards further apply if the assets constitute 10 percent or more of the cumulative assets of all the operating segments (Shamrock, 2012). Some of the key disclosure required include reconciliation of the sum of the revenues, profit or loses, assets and liabilities. Provision of the information pertaining to the measure of the total assets and total liabilities for every reportable segment and provisions of information about transactions with major customers. The key difference between the provisions of IFRS 8 and IAS 14 R lies on the introduction of the management approach on the IFRS 8. Under IFRS 8, the management is not mandated to recognize the operating segment based on the risks and rewards but based on the internal organization structure. In addition, IFRS 8 further deters the presentation of segment information along the two axes and asserts that the presentation of the segment information should be similar to that presented to the management (Slimmers, 2013).

Based on the IFRS 9-1, component depreciation occurs in cases where an asset is considered to have fundamentally different parts that should be considered to depreciate at varying rates hence the depreciation should be different treatment for each parts. IFRS stipulates that the component depreciation should instituted in instances where the companys assets provide varying patterns of benefits therefore underlining a comprehensive book value for the assets. On the other hand, revaluation of plant asset refers to the process of changing values from a book value to fair value. The process is necessitated in scenarios where there has been significant economic changes in the market and hence the book value too.

Kimmel (2013) noted that While under the GAAP, companies are expected to expense development and research costs in the income statement, under the IFRS, development costs that were incurred before capitalization are recorded as development expenses while the development costs are further regarded as those expenses that were recorded after feasible capitalization (Slimmers, 2013). The significant of this on the firm in reporting is that the development costs will not be expensed until the resulting asset is utilized. As a result, only the development before the technological viability achieved impacts the income statement. Immediately the technical feasibility has been achieved, a company can opt to reporting development costs as being capital expenses. Therefore, the expenses are depreciated over the useful lifecycle provided by the technology.

IFRS defines a continent liability as a provision which is a "liability of uncertain timing or amount". Therefore, contingent liability refers to an obligation that has significant probability of occurring in the future (Shamrock, 2012). Some of the key cases regarded as provisions for liability contingency by IFRS include employee vacation pay. An external example includes the potential fines being instituted by EU for environmental degradation while the extent of the fines is unknown, an estimate of the figures may be communicated to the public.

The fundamental principles of accounting liabilities between GAAP and IFRS are identical. Nevertheless, there exists some differences between the two concerning business recognition and measurement mandates (Mackenzie et al., 2013). On the balance sheet, IFRS stipulates that reporting of liabilities should occur in reverse order. On the contrary, liabilities in GAAP are reported with respect to the extent of liquidity. While reporting interest expenses in financial statements, GAAP recommends both the straight-line method and effective interest rate method. However, IFRS permits only the interest rate approach. Furthermore, although there are no special rules for contingent liabilities in GAAP, IFRS has specific rules for the same.

Furthermore, under IFRS, provisions relating to a contingency are measured based on the best estimate of the expenditure requisite to resolve the obligation. When a range of estimations is projected and there does not exist a quantity of the range that is more probable than any other quantity in the range, the liability is determined using the 'mid-point' of the range. On the other hand, in GAAP the liability is measured by use of the minimum amount in a range (Shamrock, 2012). IFRS also allows acknowledgment of a restructuring liability, provided a firm has agreed to restructuring plan. Under GAAP, before a restricting liability can be established, there is an additional criteria (i.e., associated to communication the plan to workforces).

References

Mackenzie, B., Coetsee, D., Njikizana, T., Selbst, E., Chamboko, R., Colyvas, B., & Hanekom, B. (2013). Wiley IFRS 2013: Interpretation and application of international financial reporting standards.

Shamrock, S. E. (2012). IFRS and US GAAP: A comprehensive comparison. Hoboken, N.J: John Wiley.

Slimmers, P. D. (2013). Financial accounting: Tools for business decision making. Retrieved from University of Phoenix eBook Collection.

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2013). Financial accounting: Tools for business decision making. Hoboken, N.J: John Wiley.

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