In this week’s discussion, we will be looking at some of the differences between U.S.
In this week’s discussion, we will be looking at some of the differences between U.S. GAAP and IFRS, which is the set of accounting rules followed by just about every industrialized nation outside the U.S. While there are many similarities between the two systems, there are also some significant differences. After learning a little bit about some of the similarities and differences, please reflect somewhat on how these differences might impact financial statement analysis, or if you think they actually would.
Conduct research to find out one or more differences that exist between balance sheets that are prepared using U.S. GAAP and those prepared using International Financial Reporting Standards (IFRS). Explain the difference and if there seems to have been a move in recent years toward convergence of the two systems. Finally, discuss how such a difference might have an impact on financial statement analysis, or if you believe that it would. Make sure to provide APA format citations and references for your sources.
Post by classmate 1
While the U.S. GAAP and IFRS both have several intricate differences (the main being that GAAP is rule-based whilst IFRS is principle-based) (Miller-Nobles & Mattison, 2020), those that concern balance sheets are more minute. However, the most noticeable one would be the difference in how the accounts are presented, specifically with their ordering (Miller-Nobles & Mattison, 2020). To put it simply, in GAAP, accounts are listed in descending order of liquidity, and current assets are listed first (Gavin, 2019). In IFRS, however, items are listed in ascending order of liquidity and non-current assets are listed first (Gavin, 2019).
There have been many recent moves to improve the convergence of the GAAP and IFRS standards (especially in light of the financial recessions, shifts towards globalization, and the Sarbanes-Oxley Act (Pologeorgis, 2022)), however, they haven’t appeared to address this specific difference in the balance sheets. This is likely for good reason, as the order in which these accounts are stated does not affect very much in the long run, at least in terms of comparing the balance sheets as they are.
With this specific difference, it is also unlikely that the different order of accounts would have any real impact on financial statement analysis, as the values would be the same on the balance sheet regardless. It might make it more tedious to conduct analysis at a glance, as a balance sheet in the GAAP method would not look similar to that of the IFRS method, but it would simply require more effort on the analyst’s part to find each value to input into their equations. The end equation would look the same, as would the end percentage and conclusion of said analysis.
References
Gavin, M. (2019, August 30). GAAP vs. IFRS: What’s the Difference? | HBS Online. Harvard Business School Online. https://online.hbs.edu/blog/post/gaap-vs-ifrs
Miller-Nobles, T., & Mattison, B. (2020). Horngren’s Financial & Managerial Accounting (7th ed., Vol. 7). Pearson.
Pologeorgis, N. A. (2022, January 28). Gauging the Impact of Combining GAAP and IFRS. Investopedia. Retrieved August 31, 2022, from https://www.investopedia.com/articles/economics/12/impact-gaap-ifrs-convergence.asp
Post by classmate 2
The sets of accounting rules IFRS and GAAP are similar in many ways but do have some differences. GAAP is mainly used in the U.S., while IFRS is primarily used by most other countries. U.S GAAP is largely rule based, with very detailed and specific guidance. IFRS, however, promotes broad principles over detailed rules. Under GAAP, both Last In First Out (LIFO) and First In First Out (FIFO) are allowed, however, under IFRS, LIFO is not allowed to be used. A big difference between the two is the order in which the items are listed on a balance sheet. GAAP list the most liquid assets first and IFRS list the least liquid assets first. I think taking some of GAAP’s more ruled based standards and applying them to IFRS’s principle-based methods could help. Finally, they are both very similar and I don’t think the differences between them would have much of an effect on financial statement analysis.
“GAAP vs. IFRS: What’s the Difference?: HBS Online.” Business Insights – Blog, 30 Aug. 2019, online.hbs.edu/blog/post/gaap-vs-ifrs.
What’s the Difference Between GAAP and IFRS? (2021, April 24). Investopedia. https://www.investopedia.com/ask/answers/011315/what-difference-between-gaap-and-ifrs
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