This article is the fourth in a series of articles that takes our readers on a journey through International Financial Reporting Standards (IFRS) with a special focus on the standards’ quintessential feature: they are principles-based. This article takes a short excursion into the pros and cons of an approach to IFRS and U.S. generally accepted accounting principles (GAAP) based on the knowledge of one of the two sets of standards and bridging to the other by purely focusing on the differences between them.
If we ask a U.S. tax specialist what the differences are between the U.S. tax system and the U.K. tax system, a likely response is that it is almost impossible to reply to such a question. The quantity of literature to be compared is too extensive. Even where basic concepts might be similar, very few aspects of the details are likely to be identical. Indeed, because of the two different systems, even if we compare two paragraphs that are worded almost identically, it cannot be concluded that they could be similarly applied. Ultimately, it is unlikely that a U.S. tax specialist would try to apply U.K. tax laws by starting with U.S. tax laws and bridging the differences.
The same conclusion can be broadly applied when approaching IFRS vs. U.S. GAAP. One cannot apply IFRS by simply starting with U.S. GAAP and bridging the differences. This does not mean that focusing on differences is worthless. Certainly it is an important tool in becoming introduced to IFRS, and possibly a necessary preliminary step to becoming familiar with IFRS. However, we should be aware that, in general, this might be the only goal that this strategy can reasonably achieve.
Knowing a different set of standards is valuable when approaching IFRS, and to be acquainted with U.S. GAAP represents an enviable and privileged starting point. What is valuable about understanding U.S. GAAP is the professional knowledge, experience, and background with the most developed and comprehensive set of standards ever written, which, if well used, can dramatically facilitate the bridge to IFRS. After all, we are still comparing accounting standards - not things as different as chalk and cheese.
It takes a long time, sometimes an entire professional life, to become proficient with one set of standards, let alone two sets of standards. At first blush, focusing on differences may seem to be the most efficient way to approach IFRS. Intuitively, if we are familiar with U.S. GAAP, we just need to focus on the differences and consequently save time and effort in becoming familiar with IFRS. This approach might give the misleading impression that if we use the “U.S. GAAP + Differences” approach, we do not have to start from scratch. This perception is misleading because if we approach IFRS directly, we are not requested to forget the U.S. GAAP knowledge we already have. On the contrary, as already highlighted, such knowledge will be a terrific ally that, if used properly, will pave the road to IFRS.
One of the main issues when comparing IFRS and U.S. GAAP is that under U.S. GAAP in numerous cases, for the sake of clarity, we end up with rules that try to set “bright lines”; the same cannot be said about IFRS. Given a specific topic, once we have identified the U.S. GAAP accounting treatment, it is quite common that under IFRS we conclude that the treatment is similar, but it depends on the specific characteristics of the uniquely identified transaction and its economic substance. It is at this level that U.S. GAAP in many cases sets a rule, while IFRS relies on the flexibility of principles. Indeed, at this level of detail, a “U.S. GAAP + Differences” approach is unlikely to provide the right answer because it focuses on U.S. GAAP when instead we would need to redirect our attention and analysis to the core of IFRS principles.
Possibly, in those cases, the only way to approach differences between IFRS and U.S. GAAP is to apply U.S. GAAP, then apply IFRS, compare the outcomes, and see if a difference emerges. In other words, in those cases, there is no substitute for understanding and applying IFRS in full. A “clean-sheet” approach is recommended because, as noted above, “U.S. GAAP + Differences” does not necessarily result in IFRS. |