The differences and similarities between United States’ Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) have dominated discussions. Most of these discussions focus on the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) with the need to globalize the application of accounting rules. To adopt IFRS, auditors and policymakers must first assess the effects of IFRS adoption on their financial reporting by keeping in mind four common issues. First, management responsibility requires that annual reports comply with IFRS guidance, which applies to all transactions under consideration. The management should also evaluate the firm’s going concern status and present the same according to International Accounting Standards (IAS) 1 (pg. 36).
In addition, it is essential to include a footnote on annual reports that clarify whether the report was prepared based on IASB standards. If the firm does not follow IFRS it must disclose reasons for the departure from IFRS guidance. Concerning IFRS adoption in certain jurisdictions, the company should note this in financial statements footnotes by stating whether IFRS was adopted in line with jurisdiction requirements (pg. 36-37).
Secondly, in comparison with U.S GAAP, IFRS, as described by observers, is considerably more principles-based than U.S. GAAP which is normally considered as rules-based. The SEC study in 2003 stated that IFRS contains both principles-based and rules-based standards. For instance, IFRS 1 (First-time Adoption of IFRS) is rules-based while IAS 8 applies a principles-based standard. This means that if the IFRS fails to deal with an issue, management should consider its judgment using other IFRS requirements on the same issue. Therefore, management should evaluate the effects of full IFRS if it intends to move along with it because it partly involves specific and detailed guidance (rules-based), and partly professional judgment applications (principles-based guidance) (pg. 37-38).
Thirdly, IFRS has established a hierarchy that applies authoritative guidance, particularly to events or transactions under consideration. And in absence of particular guidance management’s judgment should be used to develop and apply accounting policies consistent with the IFRS framework that recognizes user requirements. In absence of IFRS guidance authority, U.S GAAP is applied and IFRS benefits like simplicity, principles-based and fewer rules are foregone. Therefore, in IFRS adoption its hierarchical implications should first be considered. For public firms, SEC must articulate its judgment on the functions of FASB after IFRS standards adoption (pg. 38).
Finally, private firms have their standards such as IFRS for SMEs which includes an application framework meant for general reporting, authoritative reporting, and accounting literature. Firms within this sector are not obliged to follow complete IFRS reporting. In that respect, management must read these standards carefully and ensure they comprehend their implications because they have many challenges. For instance, periodic amendments by IASB and practices that vary from U.S requirements necessitate changes that have cost implications. In addition, stock evaluation method like LIFO is not accepted. And if the standard fails to deal with a particular transaction, management may consider complete IFRS guidance when dealing with related issues (pg. 38).
Before adopting IFRS, management should assess its implications, understand and train personnel before adopting the standards. This is because adopting new standards is challenging and that is why such issues should be taken into consideration as well as comparing the differences between IFRS and U.S GAAP guidance.
Reference
Jones, R. C., (2010). IFRS Adoption: Some General Issues to Remember. The CPA Journal, 7, 36-8.