GAAP and IFRS Financial Statements

The selected financial accounting topics for this analysis are accounting for revenues and expenses presentation or allocation. The major GAAP and IFRS financial reporting differences on these two topics can be witnessed in the financial statements presentation, under the IAS 1 provision. Under the IFRS requirements, additional subtotals/line items are presented on the income statement, if they relate to the proper understanding of a firm’s financial performance. In this regard it is necessary for entities to properly present the subtotals/line items’ relevance to those who study the financial statements. Moreover, various firms should reorganize the line items in such away that they explain certain financial performance elements adequately (Glautier, Underdown & Morris, 2010). To this end, when presenting operating income results, firms ought to make sure that the disclosed amount represents operating activities such as restructuring charges, inventory records and share based payments. However, these revenues are treated differently under the GAAP financial reporting statements guidelines. For example, certain firms’ reporting under this framework tends to minimize the subtotals. As a result, they tend to limit the presentation of additional lines on the financial statements that increase transparency. Therefore, much emphasis is not put on IAS 1 guidelines, which relate to the subtotals of the operating incomes (FASB, 2012).

 IFRS (under IAS 1) requires that expenses be presented in accordance to their nature and function. In this regard, any entity that chooses to prepare its income statement through function must provide some more disclosures regarding the expenses nature in a particular function, which should include, but it is not limited to expenses on employee benefits, amortization and depreciation. On the contrary, expense allocation under the GAAP financial accounting reporting guideline is different since it often fails to discuss its presentation (FASB, 2012). It is necessary that entities, which present the expenses by use of function, must make sure that information regarding the nature of expenses is disclosed and provided in the form of notes under their financial statements. Even though the notes provided satisfy the transparency requirement under the IAS 1, it is necessary to include the disclosures under one note (FASB, 2012).

Earnings Management Analysis

Earnings management is a technique of intervening in external financial and reporting procedures with the aim of achieving some private benefits for that purpose, and this can be facilitated by lowering the actual operating expenses to exaggerate a company’s profitability (Bennett, 2010). As a result, the directors can be awarded more bonuses for the good performance. Besides, such a good financial health attracts more investors to the company. Earnings management can as well be regarded as the judgmental accounting that is employed in financial reporting whereby revenue transactions are structured and altered with the aim of producing reports that are misleading the investors about the performance of the company (Elliot & Schroth, 2002). Such higher revenue earnings reports would not give the true position of the company’s financial performance, thus the stakeholders are misled in the process. Therefore, it can be argued that under the GAAP framework, earnings management can be done by managers to influence certain financial outcomes on investment decisions taken by the company, but under SAS 90, the auditor has the responsibility of verifying the appropriateness of the GAAP guidelines employed by the management accountants of a particular company (FASB, 2012).

General Perspective on the GAAP and IFRS Coverage

Following the above discussion, the International Accounting Standards Board and the Financial Accounting Standards Board should continue their efforts to converge IFRS, but more conversion is necessary for GAAP into a comprehensive set of global standards. This is due to the fact that GAAP often fails to incorporate the use of disclosures/notes regarding the presentations of revenues and operating expenses reporting. Finally, there must be clear distinction in the presentation of current assets, non-current assets, current liabilities, non-current liabilities, and shareholders equity, as per 5-02 GAAP rule on balance sheet (GAAP, 2009).