U.S. GAAP vs. IFRS: Fixed Assets

The Generally Accepted Accounting Principles ( GAAP ) and the International Financial Reporting Standards ( IFRS ) have many differences. One of these major differences in the intervention of fixed assets. The accounting universe is traveling through a convergence. The displacement from rules-based U. S. GAAP to principles-based IFRS is intended to better transparency and comparison in planetary markets. International companies have already switched to this new accounting rule, but companies in the United States have yet to change over to IFRS. Many comptrollers think that because IFRS is non-rules-based there is excessively much room for mistake, and when it comes to fixed assets at that place needs to be consistent. The undermentioned paragraphs will discourse the pros and cons of utilizing IFRS or U.S. GAAP; discuss the sentiments of others in the concern or who could perchance hold to utilize IFRS alternatively of U.S. GAAP.

Current Rules

U.S. GAAP

U.S. GAAP uses historical costs when entering fixed assets. This is the recorded cost of the plus at the clip of purchase and is non altered during the life of the plus. Minutes utilizing historical cost can be verified, normally with a promissory note or a debt. Therefore, the historical cost accounting system is accepted by comptrollers due to its nonsubjective nature since the minutes have already been completed, and it is by and large easier to apprehensible by its users. In an article titled “Historical Cost Versus Fair Value” the writer, Cozma Diana, states the features of historical cost are:

• that it fails to guarantee the comparison of information, as similar elements are valued ;
• it reflects the determinations whether to buy assets or contract debts, but ignores the effects of the determinations whether or non to maintain the contract debt ;
• it reports any additions or losingss that result from the alteration in monetary value, even if their merchandising or call offing have non been the cause of such additions or losingss, and accounting studies are completed by utilizing the monetary values from past minutes, with the market monetary values non referenced ;
• it provides information about the benefits expected from the assets or about the “burdens” taken by undertaking debts ;
• and accounting studies are drafted based on monetary values ensuing from past minutes, with no mention to market monetary values. U.S. GAAP merely allows a company to utilize historical cost whereas IFRS allows a company to take either method of just value or historical.

IFRS

If all companies converted to IFRS there would be global consistency in the concerned universe. One criterion of accounting would let national and international companies work together in a more consistent model. The clerking would be unvarying and companies would work under the same guidelines simplifying the scrutinizing procedure. Vitez ( 2014 ) stated that IFRS has three separate processes for fixed plus accounting, which include the choice of the cost or reappraisal method, estimation of the utile life for the plus and residuary value, and the choice of a depreciation damage method. Under U.S. GAAP, fixed assets are valued by utilizing the ‘cost method’ where the IFRS uses a different method which is known as the ‘reevaluation method’ ( Malboeuf, 2014 ). These methods are different by giving companies the ability to monetary value their assets at what they think they should be and let them alter the cost of their fixed assets at any clip.

Cost or Reevaluation Method.

The cost method is based on the historical value of a plus where the reevaluation method is based on the just value. The U.S. GAAP requires companies to unwrap information about the picks that they make about their disbursals in footers. IFRS finds footers unneeded. IFRS permits companies to book the value of belongings above the value of historical cost. This could take to companies to exaggerate their assets in order to enter higher net incomes.

Useful Life Estimate for the Asset and Residual Value.

One issue utilizing IFRS is that each constituent of the fixed plus could hold residuary value. Therefore, if each unit has many different constituents the comptroller would hold to journalized each constituent individually alternatively of the plus being journalized as one unit as in U.S. GAAP. The residuary value for an IFRS fixed plus is the value of the point at the terminal of the asset’s utile life. With IFRS each fixed plus could hold many constituents that need to be valued, whereas with GAAP the fixed plus has one utile life value.

The Selection of a Depreciation Impairment Method.

Merely like with U.S. GAAP, IFRS has many different depreciation methods available for usage, though each company must merely choose one method for each fixed plus in usage. There are some depreciation methods that work better on some fixed assets than others. Most fixed assets are assigned a depreciation method in order for the plus to be decently distributed. Seifert explains that IFRS depreciates fixed assets on a “component” footing vs. a “whole asset” footing under U.S. GAAP; this allows parts of the plus to be on different depreciation agenda than other parts of the same plus as stated by. This allows companies to replace parts of their fixed plus and allows the plus longer life and gives the fixed plus higher marker value.

Opinions: U.S.GAAP vs. IFRS

Some have described plus writedowns in U.S. GAAP as the roach motel attack: “you can acquire in, but you can ne’er acquire out! ”. The market value is frequently considered excessively unstable and that it is excessively easy to pull strings, which makes it unsuitable to be used as an estimation for the value of a plus. The features of just value are it improves the comparison by measuring similar elements in a similar manner, where every bit historical cost fails to guarantee the comparison of information, as similar elements are evaluated for nonuniform values. Some comptrollers in the U. S. prefer utilizing U.S. GAAP based accounting because it is a criterion that many of them have merely used and might be wary of the alteration that IFRS has in shop for fixed assets. It could do the accounting books to take longer to equilibrate as it creates more journal entries needed to right enumerate each fixed plus and their constituents. They are besides hesitating to exchange to IFRS because of its rule-based criteria, and with the problem, there has been in the recent old ages referring the doctoring of accounting studies some people are disquieted that if we give companies excessively much freedom so they will be less than honest with their shareholders when net incomes are low or if they get in problem with a bad concern purchase or investing. A. M. King clarifies that a possible drawback for U.S. acceptance of the reappraisal theoretical account is that because the rating is inherently imprecise, some companies may take an aggressive attack, at least in the initial reappraisal.

The on-going conflict between GAAP and IFRS consequences in a no fit criterion that is best for the U.S., neither side can hold with the other on which accounting criterion is best for the U.S. The principle-based IFRS method makes it easier for U.S. Companies to pull strings or command the result of these criteria. Companies have already found loopholes in U.S. GAAP and it is really structured. IFRS criteria would make bigger issues by letting companies put a value on each constituent of a fixed plus. It would besides do it harder for hearers to happen mistakes in the accounting system of a company. IFRS accounting would let companies alter the market value of their fixed assets, which in bend would let them exaggerate the true cost of the fixed plus. U.S. GAAP companies have to enter fixed assets at the clip of purchase, and they are non allowed to be changed until the plus is used up or disposed of during the life of the plus. Finally, one twenty-four hours U.S. GAAP and IFRS will come to a common apprehension and /or understanding but until that clip, the U.S. will lodge with U.S. GAAP accounting regulations and criteria for their fixed assets entering.

Reference

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