A.A. Ampofo, R.J. Sellani / Accounting Forum 29 (2005) 219–231
1. Introduction
Generally Accounting Accepted Principles (GAAP) is a widely used term in the prac-
tice of accounting, financial reporting, auditing, and business literature. Researchers dif- ferentiate between “big” and “little” GAAP and others reference alternatives to GAAP such as Other Comprehensive Basis of Accounting (OCBOA) or Statutory Account-
ing Principles (STAT/SSAP). Sister disciplines to accounting such as auditing also use terms like Generally Accepted Auditing Standards (GAAS) that parallel GAAP in the
accounting discipline. In practice, trading in goods, services, and securities (debt or eq- uity instruments) lead to accounting and financial reporting to ensure continuity of op- erations, analysis of results for planning and control, and decision-making. In order to
improve the legitimacy of accounting information and ensure its reliability and rele-
vancy, accountants use a body of literature and/or a set of practices and “pronounce-
ments with substantial authoritative support” called GAAP (Kieso & Weygandt, 2001). GAAP, however, varies from country to country, and often allow for alternative meth-
ods for treating the same set of transactions. GAAP is not static, but a growing body
of accounting knowledge in response to business needs; mimicking the national history, economic, social, cultural, political, trading (products/securities), and technological back- grounds.
2. Conceptual framework
Underlying U.S. and International Accounting Statement (IAS) GAAP are a set of as-
sumptions, principles, concepts, and conventions that are not GAAP by themselves (Kieso & Weygandt, 2001). However, the conceptual frameworks are critical to GAAP development and provide guidance, and serve as referent points for conflict resolution. In the U.S. and U.K., IAS and GAAP fundamental accounting concepts are historical cost, conservatism (prudence), consistency, matching (accruals), materiality (substance over form), dual aspect (double entry), recognition, and others (FASB, 2003; IASB, 2001). Research reveals that in the case of conceptual conflicts, prudence or the concept closely aligned to conservatism should apply (ASB, 2003). One good example of the application of the concepts under both IAS and U.S. GAAP is the golden rule of inventory (stock) valuation, an application of prudence principle. The golden rule states that inventory should be valued at the lower of cost or net realizable value (market) in accordance with the principle of conservatism (Kieso & Weygandt, 2001).
The Statements of Financial Accounting Concepts (SFAC) is the conceptual basis for U.S. GAAP whereas IAS-1, Presentation of Financial Statements, contains the IAS concepts. The statements also define and explain the elements of financial statements, characteristics of useful financial information (relevant and reliable), users of financial statements (inter- nal and external), and identify the fundamental accounting concepts (FASB, 2003; IASB, 2001). For instance, Financial Accounting Standards Board’s (FASB) SFAC is strikingly similar to U.K.’s and International Accounting Standards Board’s (IASB) conceptual frame- work of accounting. The conceptual frameworks define assets, liabilities, equity, revenue,
expense, realized gain, realized loss, profit, loss, as well as the relevance and reliabilityA.A. Ampofo, R.J. Sellani / Accounting Forum 29 (2005) 219–231 221
of financial information. Concepts are the bedrock for the development and application
of GAAP.
3. Sources and development of GAAP
GAAP refers to pronouncements made by appropriate accounting bodies and account-
ing literature that has substantial authoritative support in a particular jurisdiction (Kieso & Weygandt, 2001). GAAP often comes in the form of statements of financial accounting standards (SFAS), statement of financial accounting interpretation (SFIN), accounting opin- ions, statement of positions (SOP), accounting research bulletin (ARB), financial reporting standards (FRS), standard statement of accounting practice (SSAP), or simply interna- tional accounting statements, depending on the country, jurisdiction, or body issuing the GAAP. GAAP varies from country to country in terms of its sources, level of authority, allowable alternatives, and body issuing it. For example, there is U.S. GAAP, U.K. GAAP, International GAAP (IAS), German GAAP, Chinese GAAP, Canadian GAAP, and Mex- ican GAAP. The authorities responsible for setting GAAP are generally the International Accounting Standards Board, and/or some national accounting standards board, such as the Financial Accounting Standards Board in the U.S. and in the U.K., the Accounting Stan- dards Board (ASB). Professional accounting bodies like the American Institute of Certified Public Accountants (AICPA), the Consultative Committee of Accountancy Bodies (CCAB) in the U.K., the International Federation of Accountants (IFAC), and the Australian Society of Certified Public Accountants (ASCPA) with the Australian Institute of Chartered Ac- countants in Australia (ICAA), among other jurisdictional bodies, also contribute to setting accounting standards. Significant accounting studies and research that have a reasonable possibility of being sustained when challenged are acceptable as GAAP.
4. Global GAAP/IAS
With representatives from over 91 countries, the IASB sets Global GAAP/IASs (Choi, Frost & Meek, 2002). The IASB took over from setting standards from the IASC in July 2001, with the goal to set high quality standards, which are consistently applied and advance the convergence of all accounting standards (McGregor, 1999). The IASB is made up of trustees, the board, interpretations committee, and advisory committee. To date, a total of 41 IAS statements have been issued. Underlying the IAS statements are the fundamental accounting concepts and conventions enshrined in the IAS-1, Presentation of Financial Statements. Examples of the concepts are materiality, prudence, consistency, historical cost, accruals, and others. In general, the IAS have been described as providing a set of minimal accounting standards, and allowing for more alternative methods that U.S. GAAP (Collett, Godfrey, & Hrasky, 2001). IASs are used either carte blanche in some jurisdictions or as an alternative to the national accounting standard (Collett et al., 2001). For example, Ghana, Nicaragua, and other nations use only IAS as their GAAP whereas 87% of Australians
believe using the IAS together with their own national standards is a preferable (Collett et al., 2001).Examining the differences between United States
Generally Accepted Accounting Principles (U.S.
GAAP) and International Accounting Standards
(IAS): implications for the harmonization of
accounting standards
Akwasi A. Ampofo
a, 1
, Robert J. Sellani
b, ?
a
H. Wayne Huizenga School of Business and Entrepreneurship, Nova Southeastern
University, Bristol, CT 06010, USA
b
H. Wayne Huizenga School of Business and Entrepreneurship, Nova Southeastern
University, Ft. Lauderdale, FL 33315-3025, USA
Received 3 January 2004; accepted 11 November 2004
Abstract
Current trends indicate continued movement towards the harmonization of accounting standards, but not without difficulty and concern. At times, the political and financial market pressure, push the
movement in opposite directions. The paper discusses the conceptual framework used in establishing
Global Generally Accepted Accounting Principles (GAAP) (International Accounting Standards, IAS) and U.S. GAAP. Numerous transactional examples are illustrated under both Global GAAP and
U.S. GAAP treatment. Several country specific references are presented demonstrating the difficulty in
achieving harmonization. Implications for harmonization of accounting standards include arguments
“for” and “against” Global GAAP.
? 2004 Published by Elsevier Ltd.
Keywords: International accounting; IAS; Global GAAP; Accounting harmonization; Accounting standards
?
Corresponding author. Tel.: +1 954 262 5012.
E-mail addresses: aaampofo@aol.com (A.A. Ampofo), sellani@huizenga.nova.edu (R.J. Sellani). 1
Tel.: +1 860 589 4928.
0155-9982/$ – see front matter ? 2004 Published by Elsevier Ltd.
doi:10.1016/j.accfor.2004.11.002A.A. Ampofo, R.J. Sellani / Accounting Forum 29 (2005) 219–231 223
Fig. 1. Some differences in U.S. GAAP and IAS terminologies.
though American English is frequently used. Also, the Statement of Position/Balance Sheet under U.S. GAAP is often presented in order of liquidity NOT permanency. For exam- ple, under U.S. GAAP, one would see current assets whereby cash, accounts receivable and inventory would be shown in order of liquidity. Under the IAS, current assets are
shown after fixed assets in a reversed order (permanency). The rationale behind the liq- uidity presentation approach used under U.S. GAAP is the relative marketability of the assets or preferential payment of liabilities in times of liquidation/bankruptcy (Kieso and Weygandt, 2001). The IAS rationale for permanency is that a business is going concern and it is not expected to dissolve in the foreseeable future. Either approach to the presentation
of financial statements is perfectly valid and useful to the intended users of the financial statements.
6.2. Valuation of assets/properties
In general, property, plant, and equipment (PP&E) is valued at cost, current value, or fair value depending on the GAAP governing jurisdiction doing the financial reporting. In the U.S., the Statement of Concepts No. 6, Element of Financial Statements, requires that PP&E be recorded at cost historical cost and depreciated, except land, which is not depreciated. For certain real estate properties, U.S. GAAP requires the lower of cost or market value, per SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. IAS 16, Property, Plant and Equipment require historical cost basis and depreciation for PP&E but allows for revaluations to fair value. The impact is that amounts of PP&E reported under U.S. GAAP and IASs can affect the Income Statement and Balance Sheet very differently and users can reach different financial decisions. Proponents of historical cost have argued that fair values are not hard numbers, therefore subject to manipulation, and that historical
costs are a more reliable basis of recording objective transactions. Opponents of historical A.A. Ampofo, R.J. Sellani / Accounting Forum 29 (2005) 219–231
5. U.S. GAAP
Currently, the FASB is the primary body responsible for issuing U.S. GAAP in the form of statements of financial accounting standards, FASB Interpretations (FIN), Staff Positions (FSP), AICPA statements of positions and interpretations, accounting research bulletins, and others. The hierarchy displaying the sources and levels of authority of U.S. GAAP is called the House of GAAP (Kieso & Weygandt, 2001). In the case of conflict between the sources of U.S. GAAP, the first, second, and third level GAAP take precedence in that order. Kieso and Weygandt (2001) showed the structure of the U.S. Accounting Profession from the Financial Accounting Foundation and FASB and other bodies. The Statement of Financial Accounting Concepts underpins the development of U.S. GAAP much like IAS. In general, U.S. GAAP has been described as containing voluminous disclosures, rule-based and comprehensive mandates, with Anglo-Saxon historical origins, reflecting economic activity and political pressures (Choi et al., 2002; FASB, 2003; McGregor, 1999).
6. Differences and similarities in U.S. GAAP and IAS
Several research studies have been done on the main differences between U.S. GAAP
and IAS (Leuz, 2003; Pacter, 2002; Street, Nichols, & Gray, 2000). Choi et al. (2002) has also summarized the differences in the U.S., U.K., and IAS GAAPs, however, the standards appear more similar than different. In addition to the similarities previously discussed, IAS and U.S. GAAP are very similar in the areas of conceptual framework, and treatments of related party transactions, post balance sheet events, contingencies, and provisions. The financial ratios used to analyze financial statements are also very similar under the IAS and U.S. GAAP.
Sawabe (2002) notes a country specific difference in the Japanese banking industry.
In this example, Japanese Regulatory Accounting Principles (RAP) concur with GAAP on inventory valuation. Yet, corporate managers have discretion to choose between lower of cost or market (LCM) or historical cost method, for corporate accounting principles. Another example is the case of German banks. SFAS 131 and IAS 14R describe segment reporting requirements for public companies. Homolle (2003) notes there are “substantial