Ifrs And Gaap Frequent Flyer Plan Harvard Case Solution & Analysis

Question No. 3: U.S. GAAP is oftentimes labeled as rules-based, whereas IFRS are considered to be principles-based.  In the context of accounting standards for FFPs, do you think such a view is valid? Why?

Answer:

The U.S. GAAP is followed in the United States and IFRS is followed by over 110 countries. The basicdistinctive of a principles-based framework is that they providedifferent understandings and interpretations for similar transactions, which unarguably helps the reader to understand and grasp the knowledge the standard wants to give to the reader, but at the same time this situation sometimes creates ambiguity and requires a wide range of disclosures to be addressed in the notes to the accounts in the financial statements. The principles-based approach provides an objective of good and fair reporting and then give support to its approach with underlying examples for a common reader to understand, but on the other side of the mirror, sometimes it is more difficult to avoid rules, they do not provide any specific guidance over the rule.

US GAAP is often labeled as rules based. There are pros and cons to a rules based approach. On the brighter side the benefits include comparability for companies in the same industry and also for the same rule, reduction of risk and clarity in application, and on the other side of the coin, drawbacks includes that, even though the applied accounting is misleading the reader and can cause a potential harm to the decision that the investor might take, but the rule must be followed. Other disadvantagesinclude increased risk of not following the rules and non-comparability between same industries when the transactions are also similar.

On the other hand, IFRS is more based on a principle-based accounting system, the IFRS standard setting board clearly interpret where the interpretation is most needed and provide fewer exemptions than a rule-based system.

The basic and foremost difference between these two standards is the method to evaluate accounting treatment. Under U.S. GAAP standard provider havemore focus on the literature, whereas under IFRS, they putmore focus on reviewing the fact pattern..................................

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