© 2000 John Petroff
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© 2000 John Petroff |
E- Differences between GAAP and international accounting
The differences that remain between
GAAP accounting, international accounting and the accounting system
of different countries are attributable to economic conditions,
historical factors and legislation in those countries. The
following are a few examples of the most obvious of such differences.
- In many countries, the rules for setting aside a portion of
operating profits as provisions are more liberal than under GAAP
which prohibit self-insurance.
- In many countries, the accounting
system mandates "legal" reserves to be incremented by
a certain percentage of the operating profit each year. (This
is especially true for countries where the accounting rules have
been codified, such as France and Latin countries.) The historical
reason for this requirement is that firms had difficult access
to capital markets, and legislators enacted laws to force internal
financing with the intend to protect firms from unforeseen difficulties.
- In a large number of countries, a
chart of accounts exists for the purpose of maintaining a standardized
sequence, for common statement presentation and for ease of account
classification by type of operations.
- Among those countries that have charts of accounts, many use
a sequence that is reverse of that in GAAP where accounts in the
balance sheet are grouped from most to least liquid.
- In a few countries, such as the U.K., the sequence for assets
goes from most to least liquid, but equity is presented before
liabilities.
- In those countries that have experienced hyper inflation for
many years, such as the countries of Latin America, a special
account in retained earnings captures the cumulative effect of
all balance sheet adjustments for change in values of assets and
liabilities recalculation using an inflation index.
The list of differences does not appear to be very substantial, especially when compared with differences that existed in the past. Notwithstanding the initial comments on the influence of American accounting system on other countries, there are many examples of changes in GAAP rules inspired from international accounting. One such example is in the area of international accounting of foreign subsidiaries, in which the British method of accounting for transaction and translation gain/loss on foreign exchange by distinguishing between current and noncurrent assets and liabilities, was adopted as GAAP method.
An example of efforts to set common standards is illustrated by the rules on calculation of earnings per share (see Chapter 13 Section B-2) set out in Financial Accounting Standards Statements 128 and 129, "Earnings per Share", issue by the Financial Accounting Standards Board (FASB at http://www.rutgers.edu/Accounting/raw/fasb/) in 1997, and the International Accounting Standard No. 33, issued by the International Accounting Standards Committee (IASC at http://www.iasc.org.uk/) at the same time with similar content. It is interesting to note that in this joint effort the standards pertain essentially to the calculation of the number of shares in the denominator, but avoided defining the numerator because of differences of definition of what consitutes profit available to common shareholders between FASB and IASC.
Another example of harmoniztion effort is apparent in AICPA Statement of Position 98-1, "Accounting for the Costs of Computer Software developed or Obtained for Internal Use", which allows costs of development of software to be capitalized and amortized over three years. Statement of Position 98-1 is a reversal of previous prohibition of capitalizing any research and development expense, but the reversal only pertains to software development for internal purposes. It remains to be seen how a distinction can be made between software for internal use as opposed to software for outside sale.
See review questions Q-6E.1 through Q-6E.4.
See research assignments R-6.19 and R-6.20.
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