US GAAP and iGAAP Comparison

Accounting Approaches: US GAAP and iGAAP

There exist two major accounting approaches in the world: U.S. Generally Accepted Accounting Principles and Generally Accepted International Accounting Principles. US GAAP refers to the principles that manage the accounting practice in the United States, while iGAAP refers to accounting principles that are internationally binding on other countries. A closer investigation of both systems reveals similarities, especially in terms of language, reporting, and processes. However, there are significant differences between the two systems, and there seems to be a heated debate about which is the ideal way to carry out the accounting process (Nobes and Parker, 2008).

Reporting of Intangible Assets

One of the areas where similarities have been identified among the two accounting principles is the reporting of intangible assets. Intangible assets are regarded as corporate intellectual property which entails: copyrights, goodwill, trademarks, patents, trade names and franchise licenses. The main features of the intangible assets are that they do not exist physically and they are not regarded as monetary tools. However, they are considered to be long term assets attached to long term benefits. In the balance sheet, intangible assets are recorded as value holding assets used to generate cash (Epstein, Nach, and Bragg, 2009).

Conceptual Approach: US GAAP vs iGAAP

The main difference that has emerged between the two accounting principles is in the conceptual approach; where you find that the US GAAP is based on rules whereas the iGAAP otherwise regarded as IFRS or international financial reporting standards is based on strict principles. The dominating aspect of a principle based guideline such as the iGAAP is the prospect of varying interpretations for like transactions. It implies inaccuracy through allowing second guessing and therefore may create ambiguity; hence it needs far reaching disclosures in the balance sheets. The standard setting board may be employed to clarify certain parts of interpretation particularly in a principle oriented accounting system. It offers less exceptions as compared to the rule oriented accounting system. However, the iGAAP is comprised of positions and guidelines that can be easily be confused for a set of rules instead of the principles they really are. The fallout between the two accounting practices is in relation to the methods used to review accounting treatment. The US GAAP focuses more on researching literature while under the iGAAP there is a thorough assessment of the facts. By being more principle oriented, the iGAAP can be argued to represent and confine the economics of transactions more efficiently than US GAAP (Epstein, Nach, and Bragg, 2009).

Treatment of Intangible Assets

A difference can be pointed out in regards to treatment of intangible assets where the according to the US GAAP, the acquired intangible assets are identified at fair value. The iGAAP on the other hand, recognizes the acquired intangible assets on condition that they will generate economic benefits in the future and that they retain some reliability.

Treatment of Inventory Costs

When it comes to treatment of inventory costs, it is observed that under iGAAP, the LIFO last in and first out method is prohibited. The US GAAP on the other hand, allows the use of either the LIFO or FIFO first in, first out techniques. Moving to a single and uniform approach of inventory costing may improve comparability between nations and eradicate the need for analysts adjusting LIFO inventories as they conduct their comparative analysis (Nobes, and Parker, 2008).

Offsetting Assets and Liabilities

The two principles are similar in relation to offsetting assets and liabilities in the balance sheet. Under the US GAAP guidelines, the offsetting of assets and liabilities is not allowed in the balance sheet unless there is a right of setoff. A right of setoff is considered the right of the debtor legally or by contract and it allows him or her to dismiss entire or a portion of the debt owed to others through applying against the obligation an amount that the other party has not repaid the debtor. A debtor with this right therefore is enabled to offset related assets and liabilities and report the net amount. Similarly under the iGAAP, a debtor is entitled to the right to offset legally and by contract. The debtor may either choose to settle the debt or offset it wholly or just a proportion of the amount owed to a creditor through applying against that figure an amount that is receivable from the creditor. In order for an entity to offset a financial asset or liability for purposes of recording the net figure on the balance sheet some conditions must apply. They include: the debtor must be entitled to the right to offset legally and he or she must mean to realize the asset and fulfill the financial obligation simultaneously or mean to fulfill on a net based approach.

Disclosures for Setting Off Assets and Liabilities

However, some differences exist between the two accounting systems in regards to disclosures for setting off assets and liabilities. Under the US GAAP, the disclosures for setting off are confined to derivatives, securities and repurchase agreements implying transactions are borrowed to the point they are set off in financial statements or are subjected to legally enforceable netting agreement. The iGAAP on the other hand, provides disclosure needs that can be applied to all relevant financial instruments that are offset in the balance sheet, and all relevant financial instruments subjected to a legal netting agreement, regardless of whether they have been offset in the balance sheet (Epstein, Nach, and Bragg, 2009).

Refinancing Counterparty in Balance Sheet Classification

In regards to refinancing counterparty in balance sheet classification, there are various differences in the guidelines for treating particular refinancing plans which results to more debt categorized as current under the iGAAP. The US GAAP allows short term liabilities to be barred from current liabilities incase the party plans to refinance the liability in the long term. The decision to long term refinancing is facilitated by the ability to complete the procedure as revealed through complying with particular needs. Under the iGAAP, this is not the case, in case a party intends to roll over a liability for at least a year after the reporting duration under an accessible loan financing, the obligation is classified as not current. Refinancing agreements are regarded as not current if the same counterparty is part of the agreement (Nobes, and Parker, 2008).

References

Epstein, B. J., Nach, R., & Bragg, S. M. (2009). Wiley GAAP 2010: Interpretation and application of generally accepted accounting principles. John Wiley & Sons.

Nobes, C., & Parker, R. H. (2008). Comparative international accounting. Pearson Education.