Accounting Policies: US GAAP and IFRS

Introduction

Generally Accepted Accounting Principles (GAAP) is a set of accounting conventions, principles, and standards that ought to be followed by accountants when summarizing, recording and preparing their financial statements. The principles are used as the standard framework of guidelines for financial accounting in any given jurisdiction. They are conventions, and rules that accountants follow in recording and summarizing financial data. GAAP is imposed on companies to allow a minimum consistency in the financial statements used when analyzing companies. Investors do this when analyzing companies to invest in. GAAP covers information such as revenue recognition, balance sheet, item classification and outstanding share measurements (Shamrock, p.34). The U.S GAAP was set due to numerous changes that continuously occurred in the markets.

IFRS which is a short form for International Financial Reporting Standards, on the other hand, is a set of standards developed by IASB that provide a framework on how companies should prepare and disclose financial statements. Adopting a standard that is accepted worldwide is very vital since it simplifies accounting procedures by allowing companies to use a single throughout. This is done with the aim of standardizing the global accounting regulations. It provides investors and other relevant people that require the information with financial statements. They provide a basis for comparison on the financial performance of companies listed on the stock market with their international peers. The companies listed on their records are the ones that appear on the stock exchange market and are legally acquired. These companies are required to publish their financial statements according to the relevant accounting standards. IFRS is utilized by 110 nations with the aim of making businesses around the world be based on a standard system (Rich, p.55).

The immediate objective of this research paper is to provide detailed policies regarding fixed assets impairment and goodwill for both IFRS and GAAP, draw a comparison between both standards, and finally highlight the current and future possible changes regarding these policies if there are any.

Impairment of Fixed Assets

Impairment is connected to fixed assets if their expenses can apparently not be secured by future incomes. The explanations behind this supposition may incorporate changes in the publicizing environment, changing consumers’ tastes, law confinements on the convenience of items, licenses that terminate preceding getting to the customer, or if a production has been appointed yet is not pursued further.

Impairment of Goodwill

Goodwill allocation – In US GAAP goodwill is allocated to a particular reporting unit depending on the circumstances and facts. This reporting unit could either be an operating segment or a level below an operating segment. Contrary in IFRS, goodwill is allocated to a cash-generating unit (CGU), this cash generating unit is a subtle group of identifiable assets that generate income which is independent of other cash flows from other groups of assets.

Comparison

There have been various similarities as well as differences between the U.S GAAP and the IFRS. They lie in the financial evaluation, entity consolidation debt covenants, contingencies, revenue recognition, asset evaluation, depreciation among others. IFRS is however considered to be principle-based while GAAP is deemed to be more rule-based (Rich, p.12). Due to the convergence of the two systems, the differences are decreasing as days go by.

Similarities

Under both US GAAP and IFRS, fixed assets are not checked yearly, yet rather there are likewise characterized pointers of impairment. Both guidelines require goodwill and fixed assets with uncertain lives to be evaluated at any rate every year for impairment and all the more much of the time if disability markers are available. Furthermore, both US GAAP and IFRS require that the impaired asset be written down and an impairment loss perceived. ASC 350, Goodwill and Other, and the Impairment or Disposal of Fixed Assets subsections of ASC 360-10, Plant, Property, and Equipment, and IAS 36, Impairment of Assets, apply to most fixed assets, albeit a portion of the extension exemptions recorded in the norms vary.

Significant differences

Regardless of the comparability in general targets, contrasts exist in the way in which impairment is looked into, perceived and measured. In taking a gander at the determination of impairment in fixed assets, US GAAP applies a two-stage approach is applied that requires that a recoverability test be performed first (conveying measure of the benefit is contrasted and the aggregate of future undiscounted money streams produced through utilize and possible mien) (Needles et al., p.23). If the asset is not recoverable, impairment testing must be done. On the other hand, IFRS applies a one-stage approach that requires that impairment testing is done if the indicators can be identified.

Proceeding onward to impairment loss count in fixed assets, we see a significant contrast in the two systems. In US GAAP, the sum by which the conveying measure of the advantage surpasses its reasonable value, as computed as per ASC 820. While The sum by which the conveying measure of the benefit surpasses its recoverable sum; the recoverable sum is the higher of (1) reasonable value fewer expenses to offer and (2) value being used (the present estimation of future trade streams out utilizes, including transfer value) in IFRS.

Critical contrasts are also seen in the allocation of goodwill. In US GAAP, Goodwill is distributed to a reporting unit, which is characterized by a working fragment or one level beneath a working portion. On the other hand, Goodwill is allotted to as money producing unit (CGU) or divisions of CGUs that speaks to the most minimal level within the entity at which the goodwill is observed for inner administration purposes and can’t be bigger than a working segment as characterized in IFRS 8, Operating Segment in IFRS.

The Method of deciding impairment on goodwill too contrasts from one framework to the next. In US GAAP, Companies have the alternative to subjectively evaluate whether it is almost certainly that the reasonable estimation of a reporting unit is not as much as its conveying sum. Assuming this is the case, a two-stage approach requires a recoverability test to be performed first at the reporting unit level (a conveying measure of the reporting unit is contrasted and the reporting unit reasonable value). If the conveying measure of the reporting unit surpasses its reasonable value, then impairment testing must be performed. In IFRS, a one-stage approach requires that an impairment test is done at the CGU level by contrasting the CGU’s conveying sum, including goodwill, with its recoverable sum.

Besides, in Impairment loss determination on goodwill, the sum by which the conveying measure of goodwill surpasses the inferred reasonable estimation of the goodwill inside its reporting unit in US GAAP. Weakness loss on the CGU (sum by which the CGU’s conveying sum, including goodwill, surpasses its recoverable sum) is apportioned first to decrease goodwill to zero, then, subject to specific restrictions, the conveying number of different assets in the CGU are lessened professionally, in view of the conveying measure of every advantage in IFRS.

Impairment loss computation on fixed assets is another range where critical contrasts are observed. In US GAAP, the sum by which the conveying estimation of the asset surpasses its reasonable value is connected. IFRS, on the other hand, applies the sum by which the conveying estimation of the advantage surpasses its recoverable sum.

At last, reversal of loss varies in the two frameworks. In US GAAP, it is prohibited for all assets for be held and utilized. While in IFRS, it is precluded for goodwill. Other fixed assets must be checked on yearly for inversion indicators. If appropriate, the loss might be turned around up to the recently assessed recoverable sum, not to surpass the underlying conveying sum balanced for deterioration.

In conclusion, taking everything into account and looking at how things are right now, there is no further convergence set for the two frameworks. However, the FASB has a venture to improve how an entity tests fixed assets (other than goodwill) for the impairment. Numerous judgments and appraisals are included in surveying whether there are impairment indicators, recognizing CGUs and deciding the recoverable number of fixed assets. The administration ought to evaluate the distinctions that exist amongst IFRS and US GAAP, and plan painstakingly to guarantee that frameworks, forms, and the vital valuation aptitude are produced or acquired to meet the prerequisites of IAS 36. What’s more, the administration ought to consider how monitors goodwill (if by any means) and whether any progressions are required if the organization is to move from with one framework to the next.

Works Cited

Needles Jr, Belverd E., Marian Powers, and Sara York Kenny. “International financial reporting standards: An introduction.” Journal of International Accounting Research 10.1 (2011): 130-131.

Rich, Jay. Cornerstones of financial accounting. Cengage Learning, 2012.

Shamrock, Steven E. IFRS and US GAAP: a comprehensive comparison. Vol. 7. John Wiley & Sons, 2012.