Comparative Analysis of US GAAP and IFRS on Earnings per Share



Comparative Analysis of US GAAP and IFRS on Earnings per Share

Introduction

Traditionally, there have existed two different groups of accounting standards: US GAAP and IFRS; however, recently the world is witnessing a convergence towards IFRS. Despite this move, US GAAP is still applicable and it is pertinent to explore the similarities and differences under both accounting standards for the issue for Earnings Per Share (EPS).

Discussion

As the world becomes increasingly interdependent due to globalization and technological advancements, the need for uniformity in various aspects seems to gain a strong movement. One of these aspects where the global community, especially the business class is seeking global uniformity is Accounting Standards. This essay will discuss the understandings of U.S. GAAP and IFRS and the pertaining similarities and differences with respect to both standards on Earnings per Share (EPS) (Mackenzie et al., 2012).

Technically IFRS is designed to be more principle oriented while GAAP is more inclined towards rules. Nevertheless, GAAP has stood the test of time, being in existence for more than a century. It should be noted that coexistence of these two systems is simply ineffective. Both methods have their strengths and weaknesses, yet there are significant differences between the two. For example in 2001 the Swiss pharmaceutical company Novartis reported their earnings under International Accounting Standards (IAS) and United States. Earnings under IAS have been reported up to 4.1 billion, whereas under U.S. GAAP, Novartis reported earnings of 2.8 billion. This translated into quite different Earnings per Share (EPS) (Mackenzie et al., 2012).

With reference to earnings, there are many differences between these two accounting methods, as shown in the example of Novartis. IFRS initially allowed companies to separate specific items in their tax returns and allowed companies to designate them as extraordinary gains or losses, but as expected this led to abuses (Shamrock 2012).

Expenses are important to consider because they determine the final Earnings per share. Under IFRS, expenditure is defined as a decrease in economic benefits during the accounting period in the form of outflows or depletion of assets, liabilities incurred or which result in a decrease in equity other than those relating to distributions. Expenditure term is used in IFRS in a broad sense, enough to include losses as well as the normal spending categories. In this aspect, IFRS differs from U.S. GAAP, dealing with losses as a separate and distinct ...