Differences between the IFRS Income Statement and a Typical Income - Assignment Example

IFRS Table of Contents Differences between the IFRS Income ment and a Typical Income ment Prepared Using U.S. GAAP 3 Differences between the IFRS Balance Sheet and a Typical Balance Sheet Prepared Using U.S. GAAP 5 Three Disadvantages of Using IFRS Accounting with Financial Statements to an End User 7 References 8 Bibliography 8 Differences between the IFRS Income Statement and a Typical Income Statement Prepared Using U.S. GAAP International Financial Reporting System (IFRS) IFRS are set of standards based upon principles where the broad rules, regulations and guidelines are established by the International Accounting Standards Board. There is no prescribed format of IFRS income statement, so any method can be selected for presenting its expenses either by its function, purpose, nature or by its characteristics. In an IFRS income statement, there are several items that must be presented e.g. revenue, finance cost, tax expenses, profit or loss for the period, post tax gain or loss, share of post-tax results of associates and joint ventures. In case of exceptional items, a separate disclosure is required as because IFRS does not use the term ‘exceptional items’ and for the case of ‘extra ordinary items’, it does not figure in an IFRS income statement as because extra ordinary items are prohibited. The income and expenses put directly in the equity are fair value gains/(losses) on land and buildings, intangible assets, available-for-sale investments and certain financial instruments, cumulative effect of changes in accounting policy, changes in fair values of financial instruments, net tax, foreign exchange translation differences. The statement of changes in share stock holders’ equity is produced as a primary statement if not a SoRIE (Statement of Recognised Income and Expenses) is presented as a primary statement (Putra, 2008). US Generally Accepted Accounting Principles (US GAAP) GAAP are accounting rules and principles used to prepare, present, and account financial statements for a wide variety of entities. It can be presented in two formats either by a single-step format or through a multiple-step format. In case of exceptional items, a separate disclosure is required as because GAAP does not use the term exceptional items and for the case of extra ordinary items, they are described as irregular and unusual, since they are rare. The gains and losses are put in the income statement as similar to IFRS excluding the revaluations of land and buildings and intangible assets as because it is prohibited under US GAAP and the Statement of Changes in Share (Stock) Holders’ Equity is presented as similar to IFRS excluding SoRIE as because GAAP does not have SoRIE but the SEC rules permit the statement to be presented either as a primary statement or in the notes (PwC, n.d.). Differences between the IFRS Balance Sheet and a Typical Balance Sheet Prepared Using U.S. GAAP IFRS Balance Sheet IFRS Balance Sheet provides a practical set of financial statements for a business entity following IFRS standards. In the balance sheet, all the current and non current assets and current and non current liabilities are presented in the asset side items like that of investment property, intangible assets, financial assets, inventories, other receivables, deferred tax assets, cash and cash equivalents, and other assets as classified in the IFRS. On the other hand, the liabilities includes shareholders’ equity, financial liabilities, issued share capital, current tax liabilities, deferred tax liabilities capital, other payables, provisions, and other liabilities as classified in the IFRS. Offsetting of assets and liabilities cannot be done except those that are permitted by the standards and the minority interests are presented as a component of equity. US GAAP US GAAP is usually presented as total assets balancing to total liabilities and shareholders’ equity. The items presented in the balance sheet are similar to IFRS but are usually presented in declining order of liquidity. The only point of contention is that it should be sufficient enough to identify the material components and the public entities should follow specific SEC guidance. Off-setting of assets and liabilities is allowed where the parties owe determinable amounts to each other, as offsetting is enforceable by law and the minority interests cannot acts as a component of equity. Three Advantages of using IFRS Accounting with Financial Statements to an End User IFRS is accepted by the companies that are looking to enter into the worlds security market as a financial reporting structure because it provides the financial information of the companies in an user friendly way and also it enhances the quality of communication to their stockholders, reduces the investors’ uncertainty, increases market efficiency, minimize the cost of capital and reduces the risk. It eliminates the cross-borders trading as barriers of security market and is universally accepted. Accounting standards of IFRS are expected to improve and start new relationships with suppliers and customers across the national borders. IFRS bring all accounting and financial statements, in a more comparable platform and provide periodical financial information and result which is well informed to the community at large, and the organisation moves toward a globally recognised operating environment to become an accepted structure across the world. IFRS helps to show companies’ presence internationally. It also helps foreign investors to verify the accounting, auditing, banking at other international places and adopt the best practices available in system. Three Disadvantages of Using IFRS Accounting with Financial Statements to an End User A major disadvantage for the companies that are adopting IFRS is that the existing and upcoming accountants will have to relearn the entire procedure of book keeping and maintaining accounts and it is imperative that the companies have to bear the cost of relearning the entire procedure of their work force. For this reason, the US companies have experienced a decline in their profits during the first years when they change to IFRS. Despite of the global acceptance of IFRS, a certain level of quality might be lost with full acceptance of IFRS as because few companies think that by using IFRS significant costs associated with adopting IFRS may overshadow the benefits and they also may not have a market incentive to prepare IFRS financial statements. Finally, it can be said that it is disadvantageous due to the cultural influence, its huge cost for training their accountants, it is very hard to regulate in all countries as because different countries have different educational system and languages and certain accounting issues like Extraordinary Loss/Gain are not allowed under IFRS (IFRS, 2008). References IFRS, (2008). What Could be the Disadvantages of Converting to IFRS. International Financial Reporting Standards. Retrieved Online on August 12, 2010 from http://www.ifrs.com/updates/aicpa/ifrs_faq.html Putra, (2008). Income Statement. IFRS Vs GAAP: Balance Sheet and Income Statement. Retrieved Online on August 12, 2010 from http://accounting-financial-tax.com/2008/06/ifrs-vs-gaap-balance-sheet-and-income-statement/ Price Water House Coopers, (No Date). Similarities and Differences. A Comparison of IFRS, US GAAP and Indian GAAP. Retrieved Online on August 12, 2010 from http://www.pwc.com/en_IN/in/assets/pdfs/SDMay2009.pdf Bibliography Mirza, A. A. & Et. Al., (2006). Wiley IFRS: International Financial Reporting Standards : Workbook and Guide. John Wiley and Sons. Read More