Convergence Memo to Client
The accounting field mainly encompasses two main financial bodies; the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP). The current state of convergence between the IFRS and the GAAP was officially depicted in the year 2002. The FASB and the ISAB organized a meeting and agreed to collaborate towards positively impacting the U.S GAAP and IFRS. Hence, the two financial accounting bodies are described as in a state of international convergence of accounting standards.
The two international accounting bodies tend to show the similarities and differences in the aspect of revenue recognition under the two international standards in question. In terms of acknowledgment of revenue, there are several comparisons factors. The GAAP and IFSR have established revenue realization criteria centered on determining when earnings in a company business process should be recorded. Besides, the two international standards have criteria for realizing assets using the earning process (Sedki, Smith & Strickland, 2014). However, the definition of revenue in both financial bodies is quite different. Under the IFRS, revenue is defined as the total incoming monetary benefits obtained within the period coming out of the ordinary activities of a financial entity when the inflow of transactions happens as a result of an improved equity level except from the ones obtained from equity participants (Popatia, 2017).
Another aspect which shows similarity and differences under GAAP and IFRS is recognition of revenue obtained from sales and goods. Under the GAAP, revenue from sales is recognized in public companies when the revenue is gained from the products and services delivery, ownership, and evidence of an already agreed fee for payment. In terms of IFRS set standards, revenue is only realized when there is a transfer to a buyer significant risks as well as ownerships (Popatia, 2017). Also, the sellers should not maintain managerial participation or authority over the goods and services.
Nevertheless, IFRS uses a more liberal strategy to determine revenue recognition in goods and services sales. On the other hand, GAAP uses the qualitative characteristic of the reliability approach. Besides, the approach stresses its importance by mandating contingencies to be implemented before the recognition of revenue. When it comes to accounting of loyalty, both IFRS and GAPP allows programs associated with customer loyalty to be accounted for in terms of multiple-element arrangements. Despite the differences between the two bodies, the FASB and IASB are teaming up to clarify the principles that will guide the recognition of revenue and develop an inclusive revenue standard.
Companies tend to change from FASB to IFRS. However, the process is accompanied by associated impacts on the companies’ financial statements. The impacts may be negative and positive on a company’s financial statements. One of the impacts is that its company can provide its financial statements in the same context as its foreign competitors. The company’s financial statements may also improve due to the opportunity created for the company to engage in foreign investment (IFRS List of standards, 2020). There is also a way of disclosing items under the IFRS and FASB. The items in FASB are disclosed through printing and reporting the files to FASB and transmitted through any form of electronic and mechanical form. The means of disclosure is based on financial instruments and the associated risks (International Financial Reporting Standards, 2020). The disclosure of financial instruments includes various entities such as the held to maturity investments, loans, and receivables, as well as available for sales assets and the financial liabilities via the means of profit and loss.
References
IFRS List of standards. (2020). Retrieved 17 August 2020, from https://www.ifrs.org/issued-standards/list-of-standards/
International Financial Reporting Standards – Questions and Answers. (2020). Retrieved 17 August 2020, from https://www.ifrs.com/updates/aicpa/ifrs_faq.html#q5
Popatia, K. (2017). IFRS & GAAP: Reconciling Differences Between Accounting Systems and Assessing the Proposed Changes to the IFRS Constitution. Nw. J. Int’l L. & Bus., 38, 137.
Sedki, S. S., Smith, A., & Strickland, A. (2014). Differences and similarities between IFRS and GAAP on inventory, revenue recognition, and consolidated financial statements. Journal of Accounting and Finance, 14(2), 120.