Differences In The Income Statements
July 28, 2012 § Leave a comment
Hello, my fellow readers. I have created this blog to explain the differences between GAAP accounting and IFRS accounting. GAAP accounting is used by the United States, while every other country uses IFRS. Over the next five blogs, I will pick out five ways in which these systems differ. This blog will cover the differences between how the income statement looks and what can go on it.
The income statement is the most important statement used in accounting. This statement gives the most information about how well the company is doing. Under GAAP and IFRS, the statements can look completely different because both systems have different guidelines. A major difference between GAAP and IFRS involves the treatment of extraordinary items. In order for something to be deemed extraordinary it has to be unusual or infrequent in nature. A hurricane is Florida would not be extraordinary, but an earthquake would be. GAAP allows companies to record a gain or loss from extraordinary events in a separate section of the income statement. This section allows a company to take a loss and put it after continuing operations, which makes the companies financials look better. IFRS doesn’t believe that anything should be extraordinary, so it doesn’t allow any extraordinary items on the income statement.
As of now, GAAP is trying to work towards adapting the IFRS guidelines for extraordinary items. I think GAAP is doing the right thing by trying to get rid of extraordinary items. In today’s world I don’t think that anything should be considered extraordinary. Everyday things happen that no one would ever have believed could happen. Also, it is so hard to measure the financial impact major catastrophes, so companies would just be guessing at the impact. In the past ten years, there have only been two major events that could be considered extraordinary, the attack on the World Trade Center and Hurricane Katrina. In both cases, the SEC ruled that neither event could be classified as extraordinary. If these two events aren’t extraordinary, then no event should ever be classified as extraordinary, so there is no reason for there to be a section for it on the income statement.
There are some other minor differences between GAAP and IFRS. GAAP requires expenses to be classified by function, whereas IFRS allows them to be classified by function or nature. Also, it is a lot easier for an operation to be considered discontinued under IFRS. OCI, also known as Other Comprehensive Income, can be presented in three different ways under GAAP: a separate statement of comprehensive income, combined with the income statement, or a change in stockholder’s equity statement. However, under IFRS they have to be presented in a separate statement of comprehensive income. These are all simple differences, but have a huge impact of the income statement. IFRS’s guidelines make more sense because they make putting together the income statement easier and more universal. GAAP allows several ways for one thing to be done, whereas IFRS tells you it has to be done this way. Universal income statements make it easier for investors to compare companies, so I think that GAAP should become IFRS when it comes to the income statement.