US GAAP Versus IFRS Paper Example

Introduction

S GAAP and IFRS are some of the accounting terms or name usually used by people in the field of accounting. These terms are not easily understood by individuals who are not working in the accounting field making them difficult for non-accounting professionals to apply them. Besides, people are familiar with the GAAP and IFRS but are not aware that aware that these terms are accounting principle that is applied by accounts. The paper would define these terms and elaborate how they are applied in annual reports and accounting.

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The materiality of IASB and FASB

FASB also knew as the Financial Accounting Standards Boards has elaborated in one of its concept statement the definition and acknowledgement of materiality. This term is elaborated in the concept statement 8 in chapter 3 of QC11. This article states that information is assumed to be or viewed as material if misstating it or omitting it would have a significant influence in the decision-making process that an applicant makes relying on the financial information of a particular reporting entity. Besides, materiality is defined as an entity-specific aspect that has some relevance relying on the magnitude or the nature of the item or both. Nevertheless, this information should relate to the context of a financial report of an individual's entity. Moreover, the Board cannot decide on a uniform quantitative materiality threshold or predict what the material could be in a future event (FASB, 2010).

IASB also was known as the International Accounting has a similar explanation to FASB regarding materiality in their conceptual framework. This elaboration can be located be located in Chapter 3, QC11 on page 14 on its PDF portable document format. What anybody would understand this elaboration is that if the firm overstates or leaves out some information on the financial statement, this action could have an impact on the decision-making process of an investor regarding whether investing in the organization would be considered as materiality. This definition will enable a company to understand what materiality is and come up with ways on how to disclose this information to the investors. Therefore, the FASB and IASB concepts were created to protect investors from receiving false or untrue information.

Examples of Quantitative Materiality

Some cases of quantitative materiality are that if EPS also known as earnings per share are then what materiality will be normal? This statement can outline the performance of a firm and can easily determine that the company is not performing as well as it is being portrayed. This action will make investors pay more attention to the company's dilution in that they were experiencing loses because they had more dispersed shares compared to the standard amount of dispersion (Investopedia, 2017). Therefore, if there exists a dilution of 5% or more, then the firm should view this increase as a material; hence, the company is required to incorporate this information in their yearly financial report.

Secondly, if any organization has a segment accounting for 10% or more of their total segmented revenues, the company is also required to disclose this information to their potential investors. This information could include a loss or a profit of about 10% or more for the segment that is being disclosed as well as the company's assets and liquidity (White & Sondhi, 1998). Relying on this information, all of the segments should be assumed to be materials and incorporated in the company's annual financial reports. This action will promote transparency and credibility enabling the investors to trust the company because the firm has been truthful and open with its information.

The Quantified Materiality Guidelines

To quantify an aspect is always known as to measure, approximate or determine something. Besides, to quantity, the materiality guidelines of a company is essential to a company in that it assists the company to decide what it has to abide by (Merriam-Webster, N.D.). It is recommended that materiality guidelines should be quantified in that it makes sure that the company abide by the rules and stipulates what aspects should be disclosed in the annual financial reports.

If these standards could not be in existences, then the company could have the power to select the aspects to disclose in the annual financial reports as materials and non-materials. This action could have made the investors be left in the dark and not know the truth regarding the company's performances due to the inaccurate information indicated on the annual financial reports. This action could have adverse effects on both the company and the investors. The reason is that the company could be having poor performances because they cannot account for all the finances because some information might be omitted or distorted and the investors will lose their capitals because they cannot gauge the performance of the company and have to rely on the information provided on the annual reports. Companies should be ready to disclose such information in their annual reports to prevent any investment scandals, for example, the one happening at Enron.

Articulation Concept

According to Merriam-Webster (N.D.), articulation is defined as combining or joining things together. Besides, these aspects will be articulated in the financial statement to help the company gauge its performances. Moreover, perusing the separate financial statement will enable an individual to determine the performance of the company. The aspects that are always incorporated in the financial statement are the income statement, balance statement, and statement of alteration in the cash flow and equity. These statements help a person to understand the performance of a company and come up with a better decision regarding the firm. Each statement acts as a guide to help an investor to monitor the profits and losses made by the company to determine the performance of the firm.

Conclusion

When people take a look at GAAP, the principles indicated in this concept are primarily applied in the accounting profession to assist companies to abide by the laws to provide credible financial statements. Besides, the FASB and IASB have come up with concepts that acknowledge specific rules that companies apply to disclose the materiality of the annual financial reports to investors.

References

FASB. (2010). FASB Statement of Financial Accounting Concepts No. 8. Retrieved from http://fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176157498129&acceptedDisclaimer=true

Investopedia. (2017). Normalized Earnings. Retrieved from http://www.investopedia.com/terms/n/normalizedearnings.asp

Merriam-Webster. (N.D.). Articulation. Retrieved from https://www.merriam-webster.com/dictionary/articulation

Merriam-Webster. (N.D.). Quantified. Retrieved from https://www.merriam-webster.com/dictionary/quantify

White, G. I., & Sondhi, A. C. (1998). SFAS 131 (1997) IAS 14 (Revised, 1997) Segment Reporting. Retrieved from http://www.wiley.com/college/acc/white111864/resources/segment.html