Generally Accepted Accounting Principles And the International Financial Reporting Standards

Introduction

Doing business in a foreign country offers its own unique set of challenges that a firm must overcome in order for its international venture to succeed. Differences in culture mean differences in etiquette and protocol. In the context of international markets and the global arena, international managers are increasingly concerned about the problem of maintaining a common corporate culture and identity as they look to build global enterprises (CliffsNotes, 2012). According to Bradshaw & Miller (2008), managers of various segments of international companies are required to report financial statements that show the performance of the segments to various stakeholders. In preparing the financial statements, they can opt to follow either the accounting principles generally accepted in the United States (US GAAP) or the International Financial Reporting Standards (IFRS) depending on the financial/accounting framework adopted by the host country. The various segments’ financial statements are later harmonized by the parent company to reflect the firm’s complete financial status.

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Comparison of financial statements prepared using GAAP and IFRS

According to Barth et al. (2011), differences exist between the financial statements prepared using the accounting principles generally accepted in the United States (GAAP) and those prepared using the International Financial Reporting Standards (IFRS). Under GAAP, the required financial statements are the balance sheet, the income statement, the statement of comprehensive income, the statement of changes in stockholders’ equity, the statement of cash flows with limited exemptions and notes to the financial statements. Under IFRS, the financial statements required are the balance sheet, the income statement, the statement of recognized income and expense, the cash flow statement with no exemptions and accounting policies. According to Leuz (2010), GAAP does not state any specific requirement to prepare comparative financial statements while on the other hand, IFRS requires the preparation of comparative financial statements ‘except where a standard or interpretation requires otherwise’.

Barth et al. (2011), points out that in preparing the firm’s statement of cash flow, GAAP requires the use of standard headings for the items in each category of the cash flow. It equally requires a firm to use either the direct or the indirect method to report cash flows from operating activities. On the other hand, although the IFRS requires the use of standard headings, there is limited guidance on what should be included within each heading. Equally, under IFRS, either the direct or the indirect method can be used in reporting cash flows from operating activities. According to Bradshaw & Miller (2008), in preparing the firm’s income statement, GAAP requires specific items to be presented and disclosed on the face of the income statement while the IFRS requires the use of any standard format for the income statement. Bradshaw & Miller (2008), further point out that the GAAP requires a firm to select a method of presenting its expenses by either function or nature. Equally, under GAAP, interest is recognized on an accrual basis using the effective interest method, dividends are recognized when the right to receive payment is established while premiums and discounts are amortized using the effective interest method. In the same context, Leuz (2010) remarks that IFRS recognition is similar to US GAAP except that there is no requirement to separate interest from the fair value movements for instruments carried at fair value through profit or loss. GAAP also requires that net realized gains (losses) and net change in unrealized appreciation (depreciation) to be disclosed separately and a distinction made between realized and unrealized gains or losses on foreign currency transactions. The foreign currency element of gains or losses on investments may be presented either separately or together with the local currency market gains or losses on investments. On the other hand, IFRS has no requirement to disclose net realized gains (losses) and net change in unrealized appreciation (depreciation) separately. However, IFRS requires net gains (losses) on foreign currency transactions to be disclosed separately except for those arising on financial instruments measured at fair value through profit and loss. Barth et al. (2011), explain that in preparing the balance sheet, under GAAP the balance sheet has a non-classified presentation and requires the presence of specific items while on the other hand, IFRS requires the use of current/noncurrent presentation of assets and liabilities.

Obstacles that impact doing business in foreign countries

Organizations doing businesses in foreign countries face intense and constant challenges. This is due to the variety of cultural and environmental differences that exist across the globe. Some of the obstacle’s companies’ faces in foreign environments are due to political, legal, socio-cultural, economic, and technological environments (CliffsNotes, 2012). According to Leuz (2010), the political environment that is ever-changing can nurture or hamper business developments. Local governments as well as change of power may view foreign firms suspiciously thus making it hostile to foreign investment as well as forcing some businesses already in operations out of a country. According to CliffsNotes (2012), international firms may find it hard to effectively and efficiently carry out their operations once outside the borders of their respective motherland countries. This is because foreign countries have enacted diverse laws that govern consumers’ safety. Various government agencies inspect all the products produced by international firms and sanction those found not to be in good conditions for human consumption. The net impact of such rules is that international firms have to devote a greater amount of research costs and lengthier periods between new product concepts and their actual introduction. Therefore, this obstacle equally affects the international firms’ business activities in foreign countries. The economic environment of foreign countries is equally an obstacle to the international firms’ business operations since bad economic conditions will result to host countries imposing higher rates of tariffs on the international firms’ business activities. A foreign country’s level of infrastructure development e.g. utilities and power plants, communication systems and commercial distribution systems can also hinder the international firms’ business activities. Another obstacle is the technological environment. The technological environment comprises the innovations that are speedily occurring in almost all kinds of technology. Thus, in order for an international firm to succeed in selling its product to another country, the two countries’ technology should match.

Conclusion

In general, differences still exist between the financial statements prepared using the accounting principles generally accepted in the United States (US GAAP) and those prepared using the International Financial Reporting Standards (IFRS). This is because of the different regulations adopted by the two methods. Therefore, in order for a firm to succeed its business in foreign countries, it has to establish mechanisms that will enable it to overcome the various unique sets of challenges across the globe.

References

Barth et al. (2011). Are International Accounting Standards-based and US GAAP-based Accounting Amounts Comparable? Graduate School of Business, Stanford University.

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Bradshaw, T., & Miller, G. (2008). Will Harmonizing Accounting Standards Really Harmonize Accounting? Evidence from Non-U.S. Firms Adopting US GAAP. Journal of Accounting, Auditing and Finance 23, 233-263.

CliffsNotes, (2012). The International Environment. Web.

Leuz, C. (2010). Different Approaches to Corporate Reporting Regulation: How Jurisdictions Differ and Why. Accounting and Business Research 40, 229-256.

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Paperroni. (2022) 'Generally Accepted Accounting Principles And the International Financial Reporting Standards'. 10 June.

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