The International Financial Reporting Standards (IFRS) and the U.S Generally Accepted Accounting Principles (GAAP) have for a long time reflected varying approaches in the reporting standards of earnings from business and assets. IFRS primarily provides specific objectives meant for financial statements, the respective qualitative characteristics, relative conceptual dynamics in capital maintenance, and other key elements entailed in the provision of financial statements (Fay et al, n.d). The U.S GAAP on the other hand primarily derives its operational instruments from entities such a historical cost, realizable value, current cost and present value with no bias on a specific mode of approach (Fay et al, n.d). In a bid to establish a common framework, this has necessitated the establishment of a convergence effort with an aim of relative standardization of the respective principles seen in both cases. As a result, it is important to conduct an assessment of the different operational principles seen in IFRS and GAAP against the proposed convergence framework proposed by International Accounting Standards Board, in order to establish the relative effect upon earnings management with regard to the reporting of cash, receivables, depreciation and impairment of assets.First, on account of cash and receivables, International Financial Reporting Standards (IFRS) reports any bank overdrafts in the respective cash and cash equivalents domain on condition that they are payable back depending on the impending demand, which forms a critical component in IFRS cash management (Fay et al, n.d). The U.S Generally Accepted Principles (GAAP) generally offset any bank overdrafts against the holder's bank account, but this requirement is uplifted only if the account holder has significant balance in another account with the bank, which serves to offset the overdraft (Fay et al, n.d). Therefore, IFRS's inclusion of loans and receivables provides a more stable framework for higher earnings management, while the U.S GAAP lack of reporting of trade account receivable and loans receivable presents significant risk to higher earning management despite the existence of the offsetting facility.
Secondly, on account of subsequent valuation of assets, the IFRS allows component depreciation subject to the availability of varying patterns of benefit; hence, this allows an asset to be accounted for during its different useful lives (Fay et al, n.d). However, should the carrying value of the asset become unrecoverable this is registered as a write off (Fay et al, n.d). The U.S GAAP gives significant freedom in the choice of depreciation method but takes into account the changes in circumstance that may show a negative value. The U.S GAAP also reports an asset as being impaired should the future cash flows value be less than the carrying value (Fay et al, n.d). The IFRS provides a better framework for reporting depreciation by virtue of its focus on useful lives of the asset, which presents a suitable assessment in terms of asset valuation, a factor critical in earning management. Moreover, the component of impairment provides a point of convergence for both reporting standards.
Finally, it is evident that the IFRS and U.S GAAP present significantly varied standards of reporting of cash and receivables and reporting of depreciation and impairment of assets. Reporting of cash and receivables forms a critical component in the understanding of earnings management, which includes depreciation and impairment. In the present world of business, the issue of financing of business entities and the subsequent valuation of their assets forms a key element in earnings management. According to the assessment, both the U.S GAAP and IFRS posses advantages and disadvantages in reporting these key domains, which necessitates there convergence. Therefore, subject to the occurrence of similarities, for instance, as seen in the reporting standards for the impairment of assets, provides significant linkages between IFRS and U.S GAAP, and supports the International Accounting Standards Board's pursuit for the establishment of a convergence framework.
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