In the world of accounting, there are two different standards of financial reporting. International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). IFRS is the most widely used system in the world, with over 110 countries using this method of accounting for publicly traded companies. The United States of America is the only country that is yet to make the switch to this method of reporting.
GAAP vs IFRS is the most debatable topic in accounting where the former is defined as the financial reporting method having universal applicability while the latter are the set of guidelines made for financial accounting. As an account professional or business owner, it is vital to know the variations of these accounting methods, in order to successfully manage your company globally, as well as domestically.
IFRS is a globally adopted method for accounting, while GAAP is exclusively used within the United States.
GAAP focuses on research and is rule-based, whereas IFRS looks at the overall patterns and is based on principle.
3. Developed by
The principles of IFRS are issued by the International Accounting Standard Board (IASB), while GAAP are issued by Financial Accounting Standard Board (FASB)
4. Inventory Methods
GAAP uses the Last In, First Out (LIFO) method for inventory estimates. However, in IFRS, the LIFO method for inventory is not allowed.
5. Inventory Reversal
IFRS and GAAP accounting also differ when it comes to inventory write-down reversals. In GAAP, the amount of the write-down cannot be reversed. However, under IFRS, the amount of the write-down can be reversed.
6. Income Statements
Extraordinary or unusual items are included in the income statement and not segregated under IFRS. While, under GAAP, they are separated and shown below the net income portion of the income statement.
7. Intangible Assets
When it comes to intangible assets, IFRS takes into account whether an asset will have a future economic benefit as a way of assessing the value. Intangible assets measured under GAAP are recognized at the fair market value and nothing more.
8. Fixed Assets
In fixed assets, companies using GAAP accounting must value these assets using the cost model. IFRS uses a different model for fixed assets called the revaluation model.
9. Development Costs
Development costs can be capitalized under IFRS, as long as certain criteria are met. With GAAP, development costs are not allowed to be capitalized.
10. Quality Characteristics
Finally, the qualitative characteristics to how the accounting methods function. GAAP works within a hierarchy of characteristics, such as relevance, reliability, comparability and understandability, to make informed decisions based on user-specific circumstances. IFRS also works with the same characteristics, but with the exception that decisions cannot be made on the specific circumstances of an individual.
It is important to understand these key differences between IFRS and GAAP accounting, so that your company can accurately do business internationally.
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