Sample Essay: A Comparative Analysis Of The Financial Reporting In USA And Financial Reporting In The UK

This paper will aim to achieve a three fold purpose. Firstly a review of the financial environment in which IFRS and GAAP operate. Secondly the paper will also discuss the objectives of the two in addition to this an analysis of the regulatory framework will also be included. Lastly, with reference to a US firm, the paper will outline a number of changes that will have to be made in their financial statements in order for t to be eligible for use in the United Kingdom.

Radical transformations are taking place in accounting and financial reporting in the US and generally the world. “Up to 2008, the Securities and Exchange Commission the financial regulatory body in the US) necessitated for financial reporting by organizations doing business in the US stock market” (Ruppel, 2010), that their financial statements should use US generally accepted accounting principles (GAAP) or be made with accordance to US GAAP. The SEC did not recognize the International Financial Reporting Standards (IFRS) released and updated by the International Accounting Standards Board (IASB). It wasn’t until the early years of the current decade that securities commissions in a large amount of nations took the identical fundamental arrangement toward IFRS as did the United States SEC.

In nations that have frail and insubstantial financial disclosure obligations, financiers usually require and stipulate supplementary financial details when organizations issue equities (stock). As a consequence, administrations in these states are frequently obliged to amend or extend securities rules that necessitate enhanced financial reporting revelation. Developing accounting and financial reporting requirements, that is, generally accepted accounting principles, is a complex and time-consuming process. An easier and more effective solution is to adopt IFRS, which have a higher level of financial reporting disclosure than lots of countries’ GAAP.

For the particular nations that possess and implement well-built financial disclosure requirements, for instance the United States, there is not as much of an enticement or motivation to implement IFRS, owing to a minor additional advantage of shareholder safety and security. Conversely, states with tough financial statement disclosure requirements in their present GAAP can still stand to gain from assuming IFRS; specially, the aforementioned states gain by taking part in standardized and homogenous reporting principles not bound by international lines. “Shareholders consequently gain from cross-country similarity.” (Epstein, 2010) Unvarying reporting standards lessen the expenditure of financial statement reconciliation linked and connected to transnational equity (stock) listings and possibly encourage and endorse financial growth and progress.

The International Accounting Standards Board was introduced in the year 2001 by its predecessor; the International Accounting Standards Committee (IASC), which itself was created in 1973. The IASC Foundation continues to function as the mother ship of the IASB. The configuration and arrangement of the International Accounting Standards Board was an end result of a stratagem appraisal assumes by its precursor organization, the Board of the International Accounting Standards Committee. The IASB doles out standards in a sequence of assertions referred to as International Financial Reporting Standards (IFRS). The IASB assumed the body of standards first prepared by the Board of the International Accounting Standards Committee. These principles were all between the years 1973 and 2000, and carry on to be nominated.

The IASB is based in London, sovereign, clandestinely funded accounting standard-setting organization. Its members come from a wide array of different nations and possess an assortment of practical backgrounds. The IASB is dedicated to expand, in the interest of the investors, a solitary set of first-rate, comprehensible, and implemental global accounting standards that necessitate translucent and analogous details in general rationale financial statements. “The basic goal of the IASB is to work with the standard setters of different countries in order to achieve convergence all across the board.” (Pounder, 2009)

The IASB exemplifies over a hundred bookkeeping and financial institutes, representing more than eighty nations. IASB projects normally necessitate a minimum of three years from development to typical issuance. Issuance of a Standard, Exposure Draft or concluding SIC Interpretation needs endorsement and support by at least eight of the board’s fourteen members. The Securities and Exchange Commission in America seems on the threshold of recognizing IFRS as the single standard, not exclusively for non-US companies doing business in the United States market but for the companies originating from the United States as well.

The continuing globalization and resultant complication of business makes book keeping and economic reporting a theoretically difficult and intimidating procedure. From one corner of the globe to the other, accounting standards swerve as a consequence of exclusive educational, political, official, and monetary aspects and rationale. Effectual and well-organized performance/implementation of the global market demands uniformity in accounting standards. At the present time, speculators, shareholders, and investors must give sufficient thought and deliberation to the dissimilarities that subsist. Such disparities considerably restrict the growth and progress of worldwide business goings-on. Coordination and synchronization of standards has a very high probability of assisting financial and economic movement around the world.

Looking back in the very beginning i.e. of confirmed history, different people from all over the globe have contributed to and taken part in international trade and business. As far back as intercontinental buying and selling has taken place, bookkeeping is helpful and practical for recording and coverage of the conclusions. “International maneuverings are all the time more significant and vital to all kinds of business organizations.” (Financial reporting group of E, 2005) a lot of international firms are either increasing international business, or becoming element of further global conglomerate firms by means of mergers or acquirement. Therefore, additional firms than ever before are offering goods and services to consumers in just about every corner of the world.

The internationalization of trade, commerce and money markets has led to a monetary and financial setting where if accepted, homogeneous measures for financial report preparation would assist sponsors, lenders, monetary analysts, bookkeepers, and assessors. Consistency and standardization assists comparability of financial reports amongst firms of varied state settings. The International Accounting Standards Board (IASB) has always and is still making an effort to enlarge and extend coordinated financial accounting principles to please universal demands. Several international firms are required or choose themselves to follow international principles in making their financial statements.

Several reviews of standpoints regarding IFRS exposed that top business accounting officials are exceedingly approving to recognition and approval of IFRS for economic reporting by each and every one of the companies in every country, together with the United States. Merging the positive points of view of top accounting officials with the all the time more extensive acceptance and implementation of IFRS in nations all over the planet, IFRS appears to be the proverbial ‘King Kong’ for United States and international financial statements. According to many senior accountants, recognition of IFRS in almost each and every country, counting the US, seems forthcoming, possibly taking place inside the subsequent few years.

Future study could judge if acceptance of global principles directs to a more hassle free admission by a firm to distant investment hubs, lessen the outlay of capital, and monetary lucidity. Prospective research however might and possibly will examine the pros and cons connected to IFRS. Potential research can conduct a longitudinal investigation of how international standards modify over time. In accumulation, future research should evaluate the economic benefits of using worldwide standards at the localized (corporation) level and comprehensive (nationwide or international) level.

Now the paper will go on to discuss the key differences in the regulatory framework between IFRS and GAAP. To outline the basic objectives outlined in the IFRS framework; it should give details with regards to the financial position, performance, and the modifications in financial position of an organization. These details would be valuable and handy to all sorts of users of financial statements in order to assist them in making their economic decisions.

GAAP on the other hand outlines its objectives in terms of; its usefulness to the potential investors and other users who are present in the market. Financial statements should also be helpful to creditors in assessing the timing and uncertainty of future cash flows. In addition to this GAAP also mentions that financial reporting should provide details about economic resources and their diversity.

Taking an overall view of the two frameworks it can be ascertained that the IASB and FASB possess the following similarities:

The main objective of the two frameworks is similar i.e. “to help the people setting the standards in making and readjusting (to suit future needs) accounting standards.” (Wiecek, 2009)

The particular framework does and can not supersede the standards already set, in that respect the framework itself has lower standing compared to the specific standards set down by the particular standard setting boards.

However there are differences as well. These are as follows:

In general, framework of the IASB is a lot more extensive and expansive compared to the FASB framework. Basically the initiative to help the IASB in making or rewriting existing standards is only the tip of the iceberg. It also serves other uses that include helping makers of accounting statements, auditors and the final end user as well. The FASB on the other hand does not focus as much on other uses.

The dissimilarity in the rationale and functions of the two are amplified when one considers the status of the two. IASB framework is factually at a superior level than its American counterpart. For organizations that prepare their financial statements using IFRS, the preparers of the statements have to explicitly stick with all the rules and regulations mentioned in the framework. On the other hand, the GAAP in the United states of America is ranked not even above all the various textbooks and other handbooks available in the market that direct companies on how to make and correct their financial statements. Extensively used and widely prevalent industry practices even rank higher then US GAAP.

There are also very big differences in between the two standard setting boards when one considers the scope of the two. There however three main topics that need to be outlined in order to get a full idea regarding the scope of the frameworks. Firstly, what sectors the framework applies to? Secondly, the different entities those have to follow the specific rules in their respective countries. Lastly, which of the financial statements of the firm have to be made in accordance with the set framework?

Let us consider the sectors that the two frameworks are applicable to. “The variability with respect to different countries is vast.” (Walton, 2009) In the UK the ASB is in charge of setting the standards that are applicable to the private sector and also some portion of the public sector. Diversely, in the United States the GAS and FASAB (Not the FASB) set the guidelines for the public sector.

Secondly, the IASB and FASB do not ascertain a vigorous notion of the reporting individual or organization, which means, the perception of what makes a lawful organization to which the framework can be relevant. Such an idea would also describe and expand upon the limitations of the treatments of different organizations for financial reporting uses and functions. For instance, merged financial statements are prepared on the foundation that the parent unit and other sub ordinates under its management collectively symbolize a reporting organization.

Finally in the case of the applicability of the frameworks to different financial statements, the IASB framework pertains to all-purpose company accounts. That is, “the chief and most poignant financial statements and the supplementary notes” (Price water house coopers, 2008), however they are applicable to the supplementary files or non economic details, such as directors report, management discussion and analysis etc. The FASB framework pertains to wide-ranging peripheral financial reporting. This comprises not only the financial statements, but also additional economic and non monetary information. Cases in point contain further financial and non financial information enclosed in the company yearly reports, company pamphlets, and service information presentation in the yearly reports of non business organizations.

Now let us consider a specific US company and outline what changes need to be made to bring it into accordance with IFRS. For the purpose of this comparison I will be using the financial statements of Ford Motor Company. (Web 1)

Following are some of the Key Differences and Similarities between US GAAP and IFRS that have to be considered when converting the statements prepared using GAAP in to IFRS:

US GAAP is “based on inherent rules which were developed to scandals” (RIA, 2009) such as Enron where IFRS is based on practical approach which is known as principle approach which will be leading to global harmonization.

Extra ordinary items are not to be shown in statement of comprehensive income as stated by IAS 1 which results in achieving the profit before tax where as under US GAAP extra ordinary items need to be shown in statement of comprehensive income which leads to increase in the reported profit for the period of rising costs for inputs.

IAS 8 requires changes in accounting polices to be accounted for as a last year adjustment which needs restatement of last year financial statement and US GAAP need changes with total net effect of change in policy which will be shown in present income statement.

IFRS 8 segmental reporting needs operating system to be managed using the management approach of the company to evaluate and allocate resources based on the decision made by the entity and US GAAP interpret segment as an internal reporting lines of an organization which may or may not be the same type of segment and will be disclosed in the financial statement.

According to IAS 16 Property, Plant and Equipment needs be to recognized in the statement of financial position at cost or revalued amount which will lead to depreciation or recognition of impairment where as US GAAP needs tangible non-current asset to be recorded at historical cost which will be deducted (depreciation or impairment).

Both IAS 18 Revenue recognition and US GAAP have the same rules and principles for listed companies as well as private companies.

IAS 23 states that borrowing costs incurred during acquisition or construction of non-current asset should be capitalized or treated as an expense where as US GAAP states that capitalization of borrowing cost are mandatory.

IAS 27 defines Subsidiary upon control of the initial company by another company which will be called a parent company, the company would need to hold more than 50 percent of the shares otherwise parent having below 50 percent of shares would be called either a joint venture or an associate. It is not necessary that control will only be measured by the number of shares which are held by the company. This can also be measured by the majority of ownership in voting shares or voting of the board of directors. US GAAP defines subsidiary through initial company controlling another company and it also requires voting of shares.

As discussed in the above point subsidiary has a different reporting date  which should not be more than 3 months but adjustment could be made will consolidating the financial statement where as US GAAP states that it would disclose such transaction in the financial statement.

Non-controlling interest on the consolidated statement of financial position should be disclosed as a part of equity as stated by IAS 27 and in US GAAP it will be disclosed separately in between equity and liabilities.

In IAS 31 investment in joint venture could be measured through equity method or proportional consolidation and US GAAP states that only equity method should be followed except for the construction, oil and gas industries.

In IAS 32 convertible debt instrument should be split at the date of issue between liability and equity component where as US GAAP states that the entire equity instrument should be classified as a liability.

IAS 33 states about Earning per share and diluted earning per share should be disclosed in the financial statement which is for continuing operation as well as net profit or loss per share but in US GAAP a more detailed disclosure is needed and earning or loss per share is also needed for discontinued operation.

Both treatment in the IFRS 2 which deals with share based payment and US GAAP is the same where expense is recognized on the fair value of goods and services also noting that it implies on the employees services which are received.

IAS 38 which deals with intangible non-current asset states that development costs need to be capitalized only where the definition for development cost criteria are met. US GAAP states that the development cost should be treated as an expense and shown in the statement of comprehensive income. IAS 38 also requires that the asset could be revalued where there is an existence of an active market where as US GAAP thinks otherwise.

To conclude, in evaluation, U.S. GAAP and IFRS are supported by a similar fundamental thinking; ancestry employed in widespread law practice, and capital-market point of reference.  In reality, “U.S. GAAP comprises a portfolio of first-rate principles that are reasonably similar to IFRS and predicted to be still nearer by the point in time when the U.S might assume IFRS.” (Epstein, 2009)  The IFRS implementation would be a simple and trouble free changeover assuring the identical superiority and satisfaction previously enjoyed with GAAP. The analogous advantages and system effects of IFRS, though, make available a tough foundation to make the change. Still if the aforementioned advantages are unpretentious, they are frequent in personality and accumulate in the extended run.

The U.S. employs GAAP that by now imitates the IFRS, has a great amount of worldwide processes, and keeps an eye on business using a severe enforcement administration.  When taking into consideration the changeover it should be assesses whether the cost-benefit trade off would be in everyone’s favor.  The price of adopting the IFRS would be the preliminary conversion and the movement of all influence to the FASB.  In return, America will take advantage from the comparability advantages beforehand converses, which are diffident but ensue over an extensive term basis, and the frequent price savings of coverage, which largely are a hindrance to huge international U.S. corporations.  In any case, “U.S. GAAP is gradually developing throughout its acceptance of a variety of principles and usage of the IFRS.” (Tierney, 2006)

Works Cited

Ruppel, Warren. Wiley GAAP for Governments 2010: Interpretation and Application of Generally Accepted Accounting Principles for State and Local Governments. Publisher: Wiley. 2010.

Epstein, Barry J. Wiley IFRS 2010: Interpretation and Application of International Financial Reporting Standards. Publisher: Wiley. 2010.

Pounder, Bruce. Convergence Guidebook for Corporate Financial Reporting. Publisher: Wiley. 2009.

Financial Reporting Group of E. IFRS/US GAAP Comparison. Publisher: Lexis Nexis. 2005.

Wiecek, Irene M. IFRS Primer International GAAP Basics. Publisher: Wiley. 2009.

Walton, Peter. An Executive’s Guide for Moving From US GAAP to IFRS. Publisher: Business Expert Press. 2009.

RIA. Us Gaap & Ifrs: A Comparative Analysis. Publisher: Warren Gorham & Lamont. 2009.

Price water house Coopers. A Global Guide to Accounting for Business Combinations and Non controlling Interests. Publisher: PricewaterhouseCoopers. 2008.

Web 1 – http://www.ford.com/microsites/annual-reports. Retrieved on December 23, 2009.

Epstein, Barry J. Wiley GAAP 2010: Interpretation and Application of Generally Accepted Accounting Principles. Publisher: Wiley. 2009.

Tierney, Cornelius E. Federal Accounting Handbook: Policies, Standards, Procedures, Practices. Publisher: Wiley. 2006.