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IFRS and GAAP

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IFRS and GAAP

GAAP stands for ‘Generally Accepted Accounting Principles’, it was officially enforced by the US Financial Accounting Standard Board or the FASB as the accounting standard in the US. On the other hand, the IFRS which stands for ‘International Financial Reporting Standards’ is used across the world with at least 110 countries using it as their accounting standard. It was enforced by the IASB (International Accounting Standards Board). Generally, the GAAP is a rule centered system while the IFRS is more principle-centered.

Recently many companies have started to consider shifting to IFRS from GAAP for various reasons.

The Importance of Financial Bilingualism

Some IFRS requirements affect US businesses because of business conducted across borders. Due to this, the importance of financial bilingualism for United States accountants has increased. This article will describe and highlight the qualities and differences of GAAP and IFRS.

GAAP IFRS
Prominent Features precision, comparability, reliability, and simplicity. Comparability comes in 2nd to precision and reliability, and after that simplicity. precision, comparability, reliability, and simplicity. However, all are considered equal
Performance Elements comprehensive income, revenue, expenses, assets and liabilities, losses and gains Expenses and revenues, assets and liabilities
Inventory FIFO and LIFO may be applied. Only FIFO may be applied.
Inventory reveals Are not allowed Allowed under some conditions
Consolidation Operates on a risk & reward-based model. Follows a control based model
Income Statements extraordinary items are recorded separately. Extraordinary income is not recorded separately
Required Documents income and footnotes statement, changes in equity, income statement, balance sheet and cash flow statement

 

Changes in footnotes and equity, statement of cashflow, balance sheet and income statement
Earnings Per Share The overall average amount includes the calculation of interim period incremental costs The average interim period calculation is not taken into account
Framework Purpose Does not require consideration of the guidelines when no other standard is present The company’s management has to follow the same guidelines unless other standards are available
Cost of Development Every expense is considered a cost Costs may be capitalized where they meet the criteria
Functional Period Financial data of the past three years is required A years’ worth of financial data is required
Debt and Financial Liability Instruments of equity are treated the same as their face value Any equity instrument is considered debt
Assumptions The ‘’going concern’’ assumption isn’t developed enough for GAAP ‘’Going concern’’ and ‘’accrual’’ are both given importance

The Global Perspective: Which is better?

Most economic and accounting experts value a high end, consistent and globally used accounting standard. Based on this, IFRS is in for the win as it is best fitting that role. Despite this, the US and other GAAP users cannot make a sudden shift to the IFRS. Considering all of the factors listed above, both the IASB and FASB should keep trying to improve and heighten their standard while keeping interoperability in mind so the problems regarding the differences between the American GAAP and the IFRS do not keep getting deeper.

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