Any business that engages in international transactions is faced with the accounting challenge of whether to prepare a consolidated or a separated financial statement. However, IAS 27 mandates the subsidiary firms to prepare their financial statement by either using the foreign currency or the parent company’s reporting currency. The assets, liabilities, and cash flow of the subsidiary firms can only be assessed adequately if the parent firm prepares a consolidated financial statement.
The information hereinafter will cover the standards related to the preparation of a consolidated financial statement the U.S. GAAP. This paper also seeks to expound on the accounting difference that exists between US GAAP and IFRS.
The parent firm is mandated by GAAP to prepare a consolidated financial declaration that will reflect the stock of the foreign entities. The US’s General Accepted Accounting Principles consist of four basic assumptions. These assumptions seek to standardize the elements of accounting. The economic entity, monetary unit, period and ‘going concerned’ are the crucial postulates of the GAAP.
Business entity concept is the most fundamental assumption that views the corporation as a separate entity. Therefore, the consolidated financial statement should reflect the assets, liabilities and the cash flow of the subsidiary firms. This aspect clearly postulates that the firm’s revenue and expenses are separated from the owner’s expenses. The monetary unit accepted by the US GAAP for the preparation of the combined financial statement is dollar.
Accrual mode of accounting is preferred for computation rather than cash basis method. Accrual accounting, strictly observes revenue identification and the matching principles. This perspective of the GAAP ensures that all the economic entities for each of the subsidiary firms, in each of the quarterly report, comply with the standard set out in the IAS 27. However, in the Cash basis method, investment returns are accounted for when the subsidiary entity receives or pays with cash.
The joint financial statement must cover all the subsidiary companies. An exception is allowed for the foreign entity that has been consolidated earlier and is now being considered for sale. In the event that the subsidiary complies with the IFRS 5 requirement, the property held up for sale will be accounted for, according to the IAS 27. Another exception to this is the entity, whose nature of business differs from that of the parent firm. A firm that ceases to be a subsidiary can be termed as an associate, joint venture or an investment under IAS 28, 31 and 39 respectively. According to the US GAAP, the consolidated statement should not reflect any element of intergroup transactions. For instance, any intergroup losses may affect the components of the balance sheet and the assets loss cannot be accounted (Svoboda and Bohusova 25).
According to IAS 27.26, financial declarations of both the parent and foreign entities should be balanced on the same date. An adjustment for this consideration is allowed in the event that the differences in the dates are less than three months. However, uniform accounting procedures should be observed when compiling the joint financial declaration. The IAS 27.27 states that the uniformity policy will only apply to transactions and similar events carried out by the subsidiary firms (Zhu 4808).
Differences existing between US GAAP and the IFRS are clearly seen in the way the firm’s operations are spelled out. The differences are also explicit in the way both the financial policies are defined. GAAP stands for Generally Accepted Accounting Principles. On the other hand, IFRS is the shot form of International Financial Reporting Standards.
GAAP is the standard applied in the US while IFRS is used by over 110 nations throughout the globe. US GAAP is perceived to be more of rule-based. IFRS is ‘principle based’ in approach.
A significant difference exists between US GAAP and the IFRS in term of the accounting frameworks applicable to each of the two. For instance, GAAP reviews all the performance elements. These items, from the economic perspective cover revenue, are expenses, assets, liabilities, gains, losses and net cash flow. IFRS statement covers the first four elements only. In terms of consolidated declaration components, GAAP advocates a more comprehensive income statement, a component that fails to reflect in the IFRS consolidated financial statement.
Financial experts argue that US GAAP framework is limited and the management aspect is not fully expressed. The role of the management is adequately expressed in the IFRS. In terms of tangibility of assets, GAAP recognizes the assets at the fair value. IFRS framework identifies the assets that are deemed beneficial to the parent firm in the end. Precisely, the goods listed in the IFRS consolidated statement rely on the reliability aspect of the element in question. However, US GAAP structure values assets using the cost model. In addition to this model, the IFRS can as well value fixed assets using the revaluation model. In the latter model, assets are valued using the fair value parameter. Accumulated depreciation and asset loss are insignificant in the IFRS financial statement. Meanwhile, the US Security Exchange Commission is slowly shifting its focus from the GAAP to IFRS.
Svoboda, Patrik, and Hana Bohusova. ‘The IFRS and US GAAP Convergence in Mergers and Acquisitions’. International Journal of Liability and Scientific Enquiry 2.3 (2009): 309. Web.
Zhu, Xiu Fang. “A Mathematical Model of Foreign Trade Enterprise Consolidated Financial Statement.” Applied Mechanics and Materials, 380 (2013): 4804-808. Web.