Standard Format and Principles GAAP (Generally Accepted Accounting Principles)

Balance Sheet
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November 20, 2016
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Since one of the primary purposes of accounting is to provide a comparison of the past performances and reports of different companies, standard format and principles have been employed by most businesses that there is. These standard format and principles are called GAAP (generally accepted accounting principles) (Edwards & Hermanson, 2007). In contrast to this, Edwards and Hermanson (2007) said that the IFRS or International Financial Reporting Standards “represents a fundamental change for the accounting profession.” Aside from the apparent difference in the methodologies used, two other differences include (1) Measurement of unexpected losses/provisions, (2) scope of asset impairments, and (3) recognition of contingent losses/provisions (Deloitte, n.d.). According to Deloitte (n.d.), the measurement of contingent provisions differs between the two, because the “minimum amount in the range is used to measure the amount to be accrued for a loss contingency”, whereas the IFRS uses the midpoint and at the same time puts much focus into the assessment of a liability. When it comes to the scope of assessing asset impairments, the first one applies the ASC 450 while the latter removes the IAS 37 (Edwards & Hermanson, 2007). For the third point – recognition of contingent provisions – the GAAP believes that either an asset impairment or loss incurred are the requisite for loss accrual, while the IFRS believes that “an outflow of resources will be required to settle the obligation” (Deloitte, n.d.).
Expenses versus Assets
According to Edwards & Hermanson (2007), an expense is a “cost incurred to produce revenues.” In contrast to this, an asset is a resource, item, or a skill that is believed to have an economic benefit in the future. Most of the time, to produce revenue or profit, an expense in the form of an asset(s) is given up to achieve inflow of more assets (e.g. cash). Following from this, assets could be further divided based on their liquidity (ability to be converted into money or other resources in the shortest time possible) into (1) current assets and (2) long-term assets. Current assets refer to resources, items, skills, etc. which could become cash in a short span of time (one fiscal year or one operating cycle). One the other hand, long-term assets tend to be less liquid primarily because it is usually used, and are expected to produce revenues, in an extended amount of time (Benedicto, 2008). This then subjects the latter to a much greater risk of depreciation.
However, assets are not the only ones which could be divided based on the duration of its usage and expected returns. Liabilities could also be split into two: (1) current liabilities and (2) long-term liabilities. According to Nordmeyer (n.d.), a current liability is assets items, resources, or skills (most usually cash) which should be paid to the debtor within one operating cycle or a fiscal year. On the other hand, a long-term liability is given to the debtor for an extended period. It is als...