For international companies operating in the United States, adhering to US Generally Accepted Accounting Principles (GAAP) is crucial for accurate financial reporting, transparency, and compliance. Implementing effective accounting practices tailored to US GAAP requirements is essential for maintaining credibility, attracting investors, and meeting regulatory expectations. In this blog post, we will explore best practices that the American arm of an international company should follow to ensure compliance with US GAAP and optimize their accounting processes.
Understand the Differences between US GAAP and International Financial Reporting Standards (IFRS):
US GAAP and IFRS are two distinct accounting frameworks used globally. US GAAP is primarily used in the United States and is a rule-based system with specific guidelines and detailed regulations. Alternatively, IFRS is adopted by over 120 countries globally and is a principle-based system with broad principles and concepts. To ensure compliance, international companies need to understand the key differences between US GAAP and IFRS. These differences can be significant, and include topics such as revenue recognition, inventory valuation, lease accounting, and financial statement presentation. By identifying the variations, companies can adjust their accounting practices accordingly. Below are three examples of some common differences amongst these two frameworks:
Inventory Valuation Methods
- US GAAP: Permits the use of the three most common inventory valuation methods (LIFO, FIFO, and Weighted Average).
- IFRS: Prohibits the use of LIFO for inventory valuation.
- US GAAP: Requires intangible assets to be reported fair value,
- IFRS: Only allows recognition of intangible assets if they have future economic value.
Research & Development Costs
- US GAAP: Research costs are expensed as incurred.
- IFRS: Research costs are expensed as incurred. However, additional guidance requires research costs to be capitalized when certain criteria are met.
Adopt US GAAP Reporting Standards:
Companies should consider adopting US GAAP reporting standards, and in some cases restating financial statements to align with US GAAP, for a variety of reasons. Adopting US GAAP can increase a company’s credibility because it is widely recognized and accepted by investors, regulators, and stakeholders worldwide. Additionally, US GAAP provides a standardized and comprehensive set of accounting rules which enhances the comparability and consistency of financial reports. Below are some specific areas of accounting in which utilizing the US GAAP framework can assist with achieving the previously discussed benefits.
Implement Robust Internal Controls and Documentation:
Strong internal controls and documentation practices are critical for compliance with US GAAP. Implementing segregation of duties, maintaining accurate financial records, and conducting periodic audits help ensure transparency and mitigate the risk of fraud. Establishing proper documentation procedures is crucial for substantiating financial transactions and providing evidence during audits.
Proper Revenue Recognition under US GAAP:
Revenue recognition is a significant area where companies must adhere to US GAAP guidelines. ASC 606, Revenue from Contracts with Customers, highlights a 5-Step Model for revenue recognition. Ensure revenue is reported accurately using the revenue recognition standards set forth by US GAAP.
- Identify the contract with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price.
- Recognize revenue when the entity satisfies the performance obligation.
Asset Valuation and Impairment Assessments:
Valuation of assets and periodic impairment assessments are essential under US GAAP. Understand the guidelines for valuing assets such as property, plant, and equipment, and intangible assets. Conduct periodic impairment tests to assess the recoverability of assets and recognize impairments when necessary.
Disclosures and Financial Statement Presentation:
US GAAP requires specific disclosures and financial statement presentation formats. Understand the disclosure requirements for significant accounting policies, related party transactions, contingencies, and other relevant information. Ensure financial statements are prepared in accordance with the proper format and comply with the disclosure guidelines.
Compliance with US GAAP is crucial for international companies operating in the United States. By understanding the key differences between US GAAP and international accounting standards, adopting appropriate reporting standards, implementing robust internal controls, and adhering to proper revenue recognition, asset valuation, and disclosure practices, international companies can ensure compliance and maintain transparency in their financial reporting. Working with experienced accountants and staying up to date with changes in US GAAP standards will help international companies navigate the complexities of US accounting principles successfully.
Contact the Experienced Accountants at
Accounting firms provide comprehensive support to companies in complying with US GAAP. They bring specialized knowledge, experience, and resources to help companies understand and implement the accounting principles, prepare accurate financial statements, maintain internal controls, and address any compliance issues. Engaging an accounting firm can provide the expertise needed to navigate the complexities of US GAAP and ensure compliance with regulatory requirements.
At Fisher, P.A., our team of experienced accounting professionals can help you determine how these new rules impact your small business and establish the next steps to maximize your benefits. Our skilled team is ready to get to work so you can get back to doing what you do best: running your business.Call us at 704.332.7800 or fill out our contact form today to schedule a consultation.