Every United States business operating in the global economy must be aware of the differences between international and USA accounting practices.
All businesses around the globe need to accurately report their assets, liabilities, and expenditures in order for potential investors, creditors, and other stakeholders to assess their financial health.
These businesses may perform different accounting activities because they have their own set of accounting standards. Other countries use their own accounting principles, which usually accept input from a global body of accounting standards. These are background details on both accounting standards and examples of differences between them.
IT IS IMPORTANT TO BE FAMILIAR WITH THE DIFFERENCES BETWEEN INTERNATIONAL AND NATIONAL ACCOUNTING STANDARDS IF YOU DO BUSINESS INTERNATIONALLY.
The Financial Accounting Standards Board, which defines USA accounting standards, continues to work closely with the International Accounting Standards Board, (IASB). However, USA accounting is very different from international accounting.
Background information on International Accounting Standards and U.S. Accounting Standards
After the 1929 stock market crash, the U.S. set was born out of necessity. The American Institute of Accountants, a professional organization, sought to improve transparency in financial records keeping. They introduced five principles of accounting which eventually became GAAP.
The International Accounting Standards Committee (IASC), was established in the United Kingdom in the 1970s as the world became increasingly interconnected, primarily through trade agreements, and the current global accounting standards are created by this committee, now known as the IAS Board (IASB).
USA Accounting vs. International Accounting
Both the FASB (and IASB) have made efforts to combine the two sets since 2002. Foreign companies in the USA accounting can now forgo reconciling their financial statements with GAAP if they already conform to the IFRS for Securities and Exchange Commission reporting. Although the US will eventually shift to international standards, it is still a slow process.
The gap between international and national accounting standards is shrinking, but the differences that remain are still significant.
The accounting for leased purchases is a significant difference between U.S. GAAP (and the IAS). The U.S. GAAP allows companies the option to capitalize or expense these purchases based on their GAAP capitalization criteria. These purchases are capitalized by companies and investors. They add value to the company’s assets and do not count as expenses.
A leased purchase that has a future economic value can be considered an asset that can capitalize according to U.S. GAAP.
The accounting for inflation and deflation is another difference between the two standards. These fluctuations are not included in the U.S. GAAP, while the IAS uses an indicator to adjust its numbers to reflect inflation or deflation. They also have different tax bases for determining deferred tax assets or liabilities.
The USA Accounting GAAP
The USA Accounting Standards Board is responsible for defining the accounting standards. These standards are collectively known as the generally accepted accounting principles (GAAP). GAAP describes the accounting procedures and practices that public companies must follow in the United States. It also outlines what financial statements and reports must be reported.
The International Accounting Standards Board (IASB) defines the International Financial Reporting Standards, an international equivalent of the GAAP. It is used by more than 120 countries, including the EU.
Rules vs. Principles
GAAP is rules-based. This means that rules are created for specific cases, and not necessarily a larger principle. IFRS is principles-based, and therefore more consistent.
LIFO Inventory Accounting
LIFO (last in, first out) is an inventory system that records the most recent products sold as first. In order to get lower taxes, the expense of the most recently produced or bought items is first.
Businesses can use the LIFO method under GAAP. However, it is prohibited IFRS. There are also differences in inventory accounting. For example, inventory under GAAP can be carried at the lowest cost or market while inventory under IFRS is carried at a lower cost or net resizable.
Assets That Last a Lifetime
When it comes to long-lived assets, international accounting is different from USA accounting. GAAP does not allow long-lived assets to be revalued. However, IFRS allows for some revaluation. GAAP allows the depreciation of long-lived assets to be deducted, but this is rare. IFRS requires the depreciation of long-lived assets to be depreciated if they have different patterns of benefit.
Long-lived assets will be accounted for using a historical cost basis according to IFRS. In USA accounting, there is no separate definition of investment-only property.
Companies must produce balance sheets, income statements, and cash flow statements as part of IFRS. GAAP allows you to present the same reports as IFRS but with additional statements about comprehensive income.
The USA Accounting GAAP in the United States of America states that tax deferrals can be classified as either current or non-current on balance sheets on a circumstantial basis. According to the IFRS, tax deferrals cannot be considered current.
In the same way, GAAP balances must show current accounts first, while international non-current liabilities are usually listed first.
Accounting for Leases
There are differences in how lease purchases are capitalized or expensed. US companies are allowed to capitalize lease purchases according to GAAP capitalization criteria. If the leased purchase has measurable future economic value, it can be classified as a capitalized asset.
Inflation and Deflation
When it comes to account analysis, USA accounting standards ignore the effects of inflation and deflation. International standards are different. Financial reporting is adjusted to reflect inflation or deflation using a price index.
Documents Required for Financial Accounts
Companies that report under IFRS must publish a balance, income, change in equity, cash flow, and any footnotes. All of these are required by the FASB, which also adds statements regarding comprehensive income.
Strategy For Accounting Standards
The Norwalk Act of 2002, and a Memorandum of Understanding between the FASB and IASB in 2006 established the ground rules for the eventual convergence of U.S. GAAP/IAS. Since 2003, the groups have been working together to achieve this goal. The latest agenda items include the merging of standards related to insurance contracts, leases, and recording financial instruments.
While there are some differences between USA Accounting GAAP standards and those set forth by IAS in London, they are working together to find the best principles from each set of accounting principles to improve global accounting standards.
This merger of U.S. GAAP and international accounting standards helps to strengthen the global economy over the long term.