Two decades ago, international accounting standards for financial reporting were generally established on a country-by-country basis. In the US, they were and continue to be known as GAAP (Generally Accepted Accounting Principles), while other regions often refer to their standards as “local-GAAP,” representing country-specific regulations.
What is IFRS?
In the late 1980s, a new global standard emerged from the UK, leading to the publication of the initial set of International Financial Reporting Standards (IFRS). These aimed to establish a unified set of principles for global financial reporting.
IFRS began in the UK, expanded to the EU, and gained traction due to China, Japan, Canada, Korea, and India’s intent to adopt it. Now, 120 countries prefer IFRS for financial reporting and compliance.
GAAP vs. IFRS
Differences exist in the philosophical approaches of GAAP and IFRS. GAAP tends toward conservatism, promoting careful interpretations, whereas IFRS emphasizes adaptability for precision. While this adaptability might raise worries about inflating earnings, supporters of IFRS contend that prioritizing “principles” over “rules” establishes more robust frameworks within international accounting standards.
Face off: GAAP and IFRS
GAAP provides specific rules for accounting transactions, whereas IFRS offers broadly defined guidelines to ensure consistency in recording transactions. The governing bodies administering these standards often publish examples illustrating their application.
Specific Differences
Inventory valuation: GAAP permits LIFO (last in, first out) inventory valuation to represent replacing costs, while IFRS prohibits LIFO. IFRS prioritizes depleting older inventory, potentially inflating reported income but providing a more accurate inventory value, notably in inflationary periods.
Fixed assets: In line with its conservative approach, GAAP requires that fixed assets be carried on the balance sheet at their original cost, less depreciation, or at a reduced market value. This practice can result in an undervaluation of asset values. In contrast, IFRS allows for periodic revaluation of assets to account for significant changes in market value.
Development costs: According to GAAP, development costs are immediately expensed upon their occurrence. Conversely, under IFRS, specific development costs can be capitalized, followed by subsequent amortization, to better match these expenses with the periods generating revenues.
Other Differences
Distinct treatment of transaction types is demanded due to notable differences among GAAP, IFRS, and country-specific variations. These differences underscore the philosophical variances between the approaches.
The rise of competing standards, particularly IFRS, has added complexity for finance teams in global companies. It remains crucial to maintain consistent application, despite the interpretive flexibility allowed by these standards. Companies that report to diverse audiences using multiple standards may find it necessary to separate transaction postings to adhere to individual standards.
Moving forwards with IFRS and GAAP
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