The International Financial Reporting Standards

952 Words4 Pages
Investing in today’s rapidly emerging markets, one must be aware of the world’s two main accounting systems. The International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP) are two essential accounting systems of the globe. Although several countries like the United States have their own accounting systems, most conform to one main one. The Security and Exchange Commission is looking to shift to the IFRS by the end of 2015. The GAAP and IFRS are primary accounting systems which share several aspects in common however they also differ in several ways which may impact the results. The IFRS and GAAP necessitate an entity to apply the accounting guidelines that were in effect in the prior annual…show more content…
Another key difference between the two standards of the GAAP and the IFRS is consolidation issue. The GAAP prefers a “risks and rewards” model where the IFRS illustrates a control model. GAAP incorporates two chief consolidation models, a voting model and a variable interest model. The voting model appropriates control based on prevailing voting rights. All entities are initially valued as potential variable interest entities. If not, it is then calculated for control pursuant to the voting model. The notion of “de facto control” is not considered and potential voting rights are generally not incorporated in both. The IFRS only delivers a single mechanism for all entities, including structured entities which are similar to variable interest entities of the GAAP. An investor controls an investee when it has rights to variable returns from its involvement with the investee and has the capability to impact those returns through the control over the investee. Under IFRS, “de facto control” and potential voting rights are considered. Another major difference of the GAAP and IFRS standards are fourth quarter activity. The IFRS generally necessitates that the amount and nature of an expense are disclosed in a note to the annual financial statements, if a distinct financial statement on fourth quarter activity is not issued. The GAAP standard is more categorical about the nature of transactions which necessitate distinct disclosure
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