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IAS 7 is a set of practical requirements in compliance with which various entities are to organize their financial statements of cash flows. Such statements are necessary to reflect a firm’s performance across a specific period, including its on-hand cash and its equivalents in the form of short-term, cash convertible investments. IAS 7 requires entities to categorize their cash flows by operating, investing, and financing activities, as well (Ricketts et al., 2017). This framework is often compared with the U.S. GAAP standards in terms of their approach to financial statement structuring and organization. As such, the latter appears to have a stricter set of requirements, especially regarding the items’ cash flow type classification. For example, IFRS allows both operating and investing activities to be categorized as “interest received/paid,” whereas U.S. GAAP only deems operating activities eligible for it. Overall, the presence of two popular standards gives companies a possibility of choice while entailing certain risks. More specifically, preparing cash flow statements in both formats often arises. Considering their differences, the estimated numbers may considerably vary, potentially misinforming stakeholders and investors.
Another difference is embedded in the two frameworks’ understanding of contingencies and provisions, namely in terms of liabilities. GAAP demands the disclosure of all contingencies that can change the estimated earning level to a significant degree as unspecified expenses. In IFRS, contingent liabilities are included when cash outflow is deemed probable. In other words, U.S. GAAP deals with possible expenses, whereas IFRS emphasizes probable outflows of cash. The two perspectives align in understanding the best estimate as the provision of the expenditure to be incurred by the entity. However, GAAP relies on the low end of the possible loss range, whereas IFRS includes the mid-point. In terms of risks, IFRS is more explicit, accounting for them in the sections for asset retirement obligations and discounting, whereas GAAP requires discounting for future losses with a fixed amount, which is unlikely (Ricketts et al., 2017). Generally, GAAP requires accounting for higher losses than IFRS in case of uncertainties (meaning the possibility of both negative and positive outcomes).
Reference
Ricketts, R.C., Riley, M.E., & Shortridge, R.T. (2018). Information content of IFRS versus GAAP financial statements. Journal of Financial Reporting and Accounting, 16(1), 120-137. Web.
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