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IFRS Statement of Financial Position vs GAAP Balance Sheet: Is Converging Even a Feasible Idea?
For a while now International Accounting Standards Board has been trying to convince the United States to leave behind their old ways of accounting (GAAP) and use IFRS. This seems like a pretty good idea on the surface; everyone using the same accounting rules to make financial statements. However, it rarely seems to work this way. Looking at the financial statement methods alone, it is easy to see the very real problems that could come with convergence of IFRS and GAAP.
Diving into the differences laid out in the content of the third financial statement specifically, there are already major differences. GAAP refers to this financial statement as the Balance Sheet whereas IFRS prefers the title “Statement of Financial Position.” This can prove to be confusing if there were ever to be a convergence because the most basic title of a financial statement is drastically different and virtually unrecognizable to outsiders. The difference in terminology does not stop there. IFRS refers to equity as “share capital—ordinary.” Equity, alongside assets and liabilities, is one of the largest account titles needed to be known on a balance sheet/statement of financial position to even understand what the rest of the information being presented means. Without the ability to agree on simple terminology financial information can be, not only blindly lost on a page, but misinterpreted and ultimately misused in the future.
IFRS and GAAP have diverging ideas of how information should be presented on the third financial statement as well. In relation to current assets, GAAP presents the company/organizations current assets in order of liquidity. This helps to bring more attention and engagement to the more liquid assets rather than other assets that are less liquid, therefor less useful when a company needs to turn an asset into cash on demand. For example, the list begins with cash and ends with prepaid expenses. IFRS does this in reverse. The more liquid assets, being the more useful ones, are found at bottom of the current asset lists. Regardless of which way is believed to be more useful and/or the “better” way to present the current assets, the difference in presentation alone is cause for confusion to society outside of the accounting world.
The final major difference between GAAP and IFRS in relation to the balance sheet/statement of financial position is a simple word, reserve. The term “reserve” is highly discouraged from being used under GAAP. It was previously used when referencing accumulated depreciation, current liabilities, and future plant expansion. When using IFRS, the word “reserve” is perfectly acceptable. This difference may seem odd but it is relevant because these differences set GAAP and IFRS far back on their road to convergence.
With the current accounting methods that are in place with both GAAP and IFRS, convergence is not yet feasible. With the amount of disagreements and differences between IFRS and GAAP when only paying attention to the balance sheet/statement of financial position both methods need to make significant progress in order to entertain the idea of the United States switching over. However, looking forward, when the timing is right and ideas begin to match, IFRS and GAAP could one day see eye to eye.