Abstract
It is a requirement that all public listed corporations are to prepare financial statements for their stakeholders as well as the public. These financial statements are to be prepared in accordance to the accounting standards required by the country of origin of the corporation. This paper will analyse the different accounting models used globally as well as the major differences in the financial statements prepared using US GAAP and IFRS (international Financial Reporting Standards). In order to effectively achieve the differences between the accounting models, the financial statements of an internationally operating company will be considered and differences will be highlighted. This company is BDO International llimited with headquarters in the United Kingdom.
Introduction
Corporations are business organisations that are formed by shareholders. The incorporation of a business corporate is usually done at the state level, hence leading to the complication in its accounting procedures. However, it is a requirement for all the corporates to prepare and make public their annual financial statements. The accountants of a publicly limited company have the responsibility of preparing the financial statements in accordance to the International Financial Reporting Standards or the defined accounting standards stipulated by the corporation (Needles et al., 2007, p.143).
Despite the fact that there are standard accounting rules and principles to be adopted by any business enterprise, there are some certain principles that are assignable differently. For instance, this could be dependent on the geographical coverage and location of a corporation. This paper is an in-depth analysis of the differences between US corporate financial statements and those of foreign corporations. A case in study will be the 2013 financial statements of BDO International Limited, which are prepared in accordance to the IFRS (International Financial Reporting Standards). This will be compared to the US GAAP standards that are used by typical US based corporations.
Differences in the balance sheet
While the GAAP standards refer to it as a balance sheet, the foreign company standards prepare a statement of financial position as at a specific date. When using IFRS, assets are classified into current and non-current, and the same applies to liabilities, which are grouped into current and non-current ones. For example, the statement of financial position of BDO International Limited clearly distinguishes the current assets from the non-current assets as shown on page 17 of the financial report (Illustrative Financial Statements, 2013, p.17).
The current assets of BDO International Limited include inventories, trade and other receivables, available-for-sale investments and cash, among others, while non-current assets are investment property, deferred tax assets, investment property and other receivables, just to mention a few.
Secondly, under the GAAP standards, inventory is incorporated to trade receivables, while under IFRS, they are separated. Thirdly, current liabilities under IFRS are those that can be settled within one year, while under GAAP, current liabilities are just short-term obligations that arise from the normal business operations. In addition to this, the statement of financial position discloses more information on share capital, such as the number of shares and par value, etc. The balance sheet as per US GAAP makes no disclosure on share capital although this information can be given in the notes or separate stockholders’ accounts. Finally yet importantly, foreign companies using IFRS cannot offset liabilities with assets or expenditure with income on the statement of financial position while US GAAP allows set-offs.
Differences in the income statement
Unlike in the U.S GAAP standards, the income statement in IFRS neither segregate extraordinary nor present them in the income statement. Secondly, the income statement prepared using IFRS puts together expenses and losses while that prepared using GAAP clearly defines losses from expenses (Thornton, 2012, p.46). Again, under the US GAAP method of presentation, foreign currency items are reported while the IFRS reports the exchange differences on foreign translation. For example on page 19 of the BDO International Limited statement of comprehensive income shows exchange gains that come as a result of translation of foreign operations (Illustrative Financial Statements, 2013, p.19).
When it comes to differences in revenue of construction contracts, GAAP does not affect projects that are not completed while IFRS recognises the extent to which the project has been completed. Lastly, IFRS income statement recognises revolution gains, while GAAP does not recognise revaluation gains.
Differences in the information provided
The information provided in GAAP financial statements is different from the information provided in IFRS in various ways. First, IFRS financial statements will provide more information than GAAP financial statements do. For instance, IFRS statements disclose any assumptions made that may have material risks on the statement figures (Thornton, 2012, p.46). In addition, unlike GAAP that does disclose information on capital management, IFRS gives a summary of all qualitative information on capital management.
Classifications of accounting models that are used in different geographic regions
The geographical location is one of the modes of classification that is used classifying accounting models. These models are influenced by five major regions that include Anglo-Saxon used in the United States and the United Kingdom, German Model used in Germany and Switzerland, Latin Model used in France, Brazil, and Italy, and Asia-Pacific model used in Japan and China regions. The German model is managed by the German Accounting Standards Board (GASB) and advocates for the use of International Accounting Standards (IAS) by public corporations.
In the United Kingdom, accounting standards, such as Financial Reporting Standards (FRS) that are issued by the Accounting Standards Board, are to be used and complied with by all the publicly listed companies. In Japan, there is collaboration between the Accounting Standards Board and the Financial Accounting Standards Foundation. The region also plans for reconciliation between the two accounting models. The United States advocates for the use of GAAP accounting method for its corporations.
Consistency of the classifications with the U.S GAAP
The aforementioned classifications of accounting models show some variations from the normal US GAAP. Therefore, there is no consistency between US GAAP and other models, such as IFRS, FASB, and IAS. Differences normally arise from the way the models deal with foreign currency translations. Given the fact that most of the accounting models are used by countries using different currencies, it is expected that currency translations differ. The models also depict differences in the way each model handles depreciation and amortisation. For instance, US GAAP model accounts for depreciation and amortisation, when they are actually incurred, while the other methods use the fair value of the fixed assets. There is also the difference of handling accounting changes between the US GAAP and the other accounting models (Nobes, n.d, p.1).
Conclusion
From the above discussion, it is evident that the accounting model used is important for the financial report and information of the concerned company or corporation. The responsibility of preparation and analysis of the financial statements of a company is shared among the directors, accountants, auditors and the whole workforce that participate directly and indirectly. As such, it is important that the involved parties are aware of the accounting model to be used.
For instance, the paper illustrates different accounting models for different regions of the world. Finally yet importantly, accountability is a key principle, which is endorsed to the directors and shareholders who have the duty of providing reliable financial information. Additionally, transparency of the financial information is an obligation of all the stakeholders of the company (Madura, 2006, p.78). As such, it is important to follow the accounting model stipulated by the company.
Reference List
Illustrative Financial Statements: Year Ended 2013. (2013). Web.
Madura, J. (2006). Introduction to business. New York: Cengage Learning.
Needles, B. Powers, M. And Crosson, S. (2007). Financial and Managerial Accounting. New York: Cengage Learning
Nobes, C. (n.d.). International Classification of Financial Reporting. Web.
Thornton, G. (2012). Comparison between U.S. GAAP and International Financial Reporting Standards. Web.