What Are the Differences Between the U.S. and the Foreign GAAP?

GAAP stands for "generally accepted accounting principles." It consists of rules or standards established by the Financial Accounting Standards Board that are the basis for reporting financial information from the U.S. private sector. These guidelines developed over years of accounting.

History

Before the regulation of the GAAP, most any accountant could justify his bookkeeping and audits by stating that he used "generally accepted accounting practices." This allowed a lot of wiggle room for fraudulent bookkeeping to create the aura of strength for interested investors. Through a series of different watchdogs and rules came the Financial Accounting Standards Board that set the rules for the U.S. companies. As society and business became more global, it was obvious that there was a need to standardize foreign accounting, and hence came the development of the International Accounting Standards Commission in Britain. The name for the foreign GAAP is the International Financial Reporting Standards (IFRS).

Time Frame

The IFRS has no specific period mentioned, but there must be comparative information shown from previous periods for any amounts shown on a statement. In the U.S., the SEC requires that the balance sheet show a 2-year period. The other statements must show the 3-year period that ends on the same date as the balance sheet. The GAAP shows no general layout unless it is a public company and must follow the regulation S-X. The IFRS requires minimum items, but not it is as stringent as regulation S-X requirements.

Debt Covenant Violations

Debt covenant violations also differ in accounting practices between U.S. GAAP and IFRS. In the U.S., once there is a debt covenant violation, the debt is noncurrent if the lender agrees to modify the item before the financial statement. The accounting firm also has the flexibility to label deferred taxes as current or noncurrent depending on the liability or nature of the asset. With the IFRS, all debt is current unless the lender gives the okay before the production of the balance sheet, not the financial statement, and deferred taxes come under the listing as current.

Income Statements

Function is the method of classifying the expenses on the income sheet in the GAAP, but the IFRS bases expenses on either function or nature. If the company selects function, then there must be notation about the nature of the expenses. Income statement extraordinary items are restricted to unusual and infrequent in the U.S. but prohibited in foreign GAAP. Changes in the stockholders equity appear as either a footnote or separate statement in the U.S., but they must appear in a separate statement called a SORIE. There is much more leeway in the IFRS to presenting non-GAAP information if it makes the information about performance easier to understand.

Value

Fair value of assets is either entry or sale price on foreign GAAP and exit price in the U.S. The criteria to report changes in fair value are more restrictive in the foreign GAAP. The U.S. GAAP allows day one gains reported even if not all inputs are observable when using the measurement model. They all must be observable for the IFRS. In the U.S., obligations that have components of both debt and equity are liabilities. They are either in the IFRS, based on the agreement to deliver shares, cash or assets. Compound financial statements are divided into debt, equity and sometimes derivative components on foreign GAAP. This is not so in the U.S. The foreign GAAP doesn't allow shortcut methods of hedge effectiveness, but the U.S. does.

Considerations

There are many other vast differences between the U.S. GAAP and the foreign GAAP. To explore more of these, follow the link to the booklet prepared by Ernst and Young in the Resources area below.

Resources

• U.S. GAAP vs. IFRS by Ernst and Young