August 1, 2012 § Leave a comment
For my last blog, I am going to talk about many of the remaining differences that exist between GAAP and IFRS. These differences relate to receivables, revenue recognition, liabilities, and fair value. Most of these differences are not that drastic, but when added up, make a big difference with accountants.
GAAP and IFRS differ a little bit when it comes to how to recognize revenue. IFRS usually allows companies to recognize revenue earlier than GAAP. For both GAAP and IFRS, revenue cannot be recorded until it is realized and earned. However, IFRS has far less strict rules on when revenue can be realized, so usually companies under IFRS can record revenue earlier than GAAP. For instance, a product has to be delivered to the customer for revenue to be recognized under GAAP, however, IFRS allows companies to recognize that revenue as long as they have reasonable belief that the product will be delivered. I think that IFRS is too lenient on their rules when it comes to revenue recognition. It would be easier to cook the books under IFRS, so GAAP has the better standards in this case.
There are also a lot of differences between GAAP and IFRS when it comes to current liabilities and contingencies. One of those differences is that GAAP requires liabilities to be recognized when they become a present obligation. This means that they are recognized when the time comes that the company will start paying off the liability. IFRS recognizes the liability when the formal plan is announced. It doesn’t matter when the company plans on paying off the liability, as soon as they announce it they have to record it. Another difference is that contingent gains are not recognized under GAAP, whereas they are recognized under IFRS. IFRS has the right philosophy in these two cases. When a company decides to add a liability, they know that eventually they will have to pay it off, so that liability should be recognized from the very beginning. Also, for something to be considered a contingent gain, there has to be a very high chance of it occurring, so it is a safe bet to go ahead and recognize that gain.
GAAP and IFRS also differ about how fair value should be determined and whether or not impairment of receivables can be written back up. GAAP has developed a three level hierarchy of fair value methods. Companies use this hierarchy to determine which value they are given is the fairest. IFRS has no such hierarchy, but they are trying to develop one. This hierarchy makes fair value a lot simpler, so IFRS needs to hurry up and develop one. A company’s receivables may become impaired if the market has a sudden shift. Companies will write down their impairments when the market drops, but will want to write their receivables back up when the market rises later. GAAP does not allow companies to write back up impairments. This is not a good rule because it means that receivables are not accurately valued on the company’s balance sheet.