Different name but same rules

In spite of not using the same word ‘principle’, eight of the ten American accounting principles exist as part of the rules to be followed in International Financial Reporting Standards, IFRS.

For instance, one of the ten GAAPs is the Principle of Permanence of Methods. Procedures used to prepare financial reports must be consistent under this principle. The term ‘permanence of methods’, however, is too American for IFRS. Reliability and comparability are more acceptable words in this context. Information, including accounting policies must be presented ‘in a manner that provides relevant, reliable, comparable and understandable information’. (Paragraph 17b of IAS 1, Presentation of Financial Statements)

Another one is the Principle of Sincerity. Sincerity requires financial statements to be accurate and impartial. The International Accounting Standards Board do not require their financial statement to be sincere. They use a different expression ‘faithful representation’, which according to them means financial statements which are ‘complete, neutral and free from error’. [1]

GAAPs not in IFRS

The two American GAAPs not used by IFRS, are the Principle of Regularity and the Principle of Utmost Good Faith.

The principle of regularity simply states that companies must adhere to GAAP.  The International Accounting Standards Board do not call this a principle but simply require that companies state their financial statements adhere to the International Financial Reporting Standards. Similar but not quite the same!

The Principle of Utmost Good Faith is an attempt perhaps to force US accountants to be honest. Some GAAPs in accounting literature include the principle of good faith without the qualification ‘utmost’. Is utmost necessary? Good faith on its own seems adequate. I cannot imagine two sets of financial statements for the same company with different results, one prepared with good faith and the other with utmost good faith. They must surely be the same with or without’ utmost’!

IFRS do not consider this principle necessary at all. You will note however that IFRS do use the word ‘faith’ in their rule above: that of ‘faithful representation’. 

I find it interesting that ‘faith’ in some form or another is important in both sets of standards, even if not always with ‘utmost’ or ‘good’.

[1] Conceptual Framework for Financial Reporting issued by the International Accounting Standards Board, paragraph 2.13.