We live in a progressively worldwide economic climate, so it's important for local business owner and accountancy professionals to be familiar with the distinctions in between both primary bookkeeping approaches utilized worldwide.
International Financial Reporting Standards (IFRS) as the name implies is an international typical established by the International Accounting standards Board (IASB). UNITED STATE Typically Accepted only General Accepted Accounting Principles (GAAP) and it is just used in the USA. GAAP is developed by the Financial Accounting Standards Board (FASB).
Following are the 10 major differences between IFRS and GAAP;
1. Regional vs. Worldwide
IFRS is used in more than 110 countries of the world, including the Europe well as several Asian and South American countries. GAAP, on the other hand, is only utilized in the United States. Firms that operate in the United States and overseas might have extra intricacies in their accountancy.
2. Policies vs. Principles
GAAP has a tendency to be a lot more rules-based, while IFRS tends to be more principles-based. Under GAAP, firms might have industry-specific rules as well as guidelines to adhere to, while IFRS has principles that call for judgment and analysis to figure out exactly how they are to be used in a given situation.
Nonetheless, convergence jobs between FASB and IASB have actually resulted in new GAAP and also IFRS criteria that share a lot more resemblances than differences. For instance, the recent GAAP requirement for profits from contracts with consumers, Bookkeeping Standards Update (ASU) No. 2014-09 (Topic 606) and the corresponding IFRS criterion, IFRS 15, share a common principles-based strategy.
3. Inventory Valuation
Both GAAP as well as IFRS permit First In, First out (FIFO), weighted-average cost, and certain identification approaches for valuing inventories. However, GAAP permits the valuation of inventory under the Last In, First out (LIFO) method, which is not allowed under IFRS. Utilizing the LIFO technique might cause artificially low net income as well as may not reflect the real flow of stock items with a business.
4. Inventory Write-Down Reversals
Both methods permit inventories to be written down to the market price. However, if the marketplace value later increases, only IFRS permits the earlier write-down to be turned around. Under GAAP, turnaround of earlier write-downs is forbidden. Stock evaluation might be more unstable under IFRS.
5. Fair Value Revaluations
IFRS permits revaluation of the tangible as well as non-tangible assets as per the relevant standards i-e IAS 16 and IAS 38 to fair value if fair value and also financial investments in valuable securities. This revaluation might lead to an increase or a reduction in the asset's value. Under GAAP, revaluation is restricted with the exception of marketable securities.
6. Dealing with impairment loss
IFRS and GAAP allowed the recognition of impairment loss for the assets which have significant useful life so that the current market values of the assets are correctly reflected in the financial statements. However, when circumstances change and development take place in the accounting and business world the IFRS allowed the reversal of the impairment losses for all tangible and non-tangible assets except Goodwill. GAAP takes an extra conservative approach and prohibit the reversal of the impairment loss for all tangible and non-tangible assets.
7. Recognition and valuation of intangible assets
Under the IFRS the internally generated intangibles are recognized and the development cost incurred on the development of the intangible asset shall be recognized as intangible asset only if the development cost meet the criteria mentioned in the IAS -38.
Under the GAAP the entities are not allowed to recognized the development cost as intangible asset only with the exception of the development cost of specific software and GAAP allowed that such development cost incurred on the development of software shall be recognized as intangibles and the software is capable to be used in an intended manner.
8. Recognition and valuation of fixed assets
Under the IFRS the fixed assets are recognized at cost initially at the time of purchase. However, IFRS allowed the revaluation of the fixed assets and the entities are allowed to record the value of the assets based on the current market value. Similarly, IFRS requires that significant components of the fixed assets shall be depreciated separately for example in case of Boeing or Jet aero plane the engine, body and other parts shall be depreciated separately rather than to depreciate the whole aero plan using same useful life and rate of depreciation.
While under the GAAP the assets are recorded at cost initially at the time of purchase. However, GAAP allow the depreciation of significant components separately but does not have compulsory requirement for it as like IFRS has.
9. Recognition and valuation of the investment property
IFRS includes and recognize the category of the investment property which is kept for the investment purpose either by way of renting out or in the form of capital appreciation. IFRS requires that such investment properties shall be recorded at cost initially at the time of purchase while it allows the revaluation of the investment properties to the fair value as per the requirements of IAS 40.
Under the GAAP, the investment properties are recognized at cost initially at the time of purchase while it is silent on the revaluation of the investment properties.
10. Lease Accounting
There are more similarities between IFRS and GAAP for the accounting treatment of lease but there is also some minor differences which are noted as under;
Under the IFRS the all the leases shall be classified as the finance lease and no lease shall be recognized as the operating lease with only two exceptions;
=> The lease is of insignificant value and
=> The lease period is less than twelve months
The IFRS is more concerned about the recognition of the lease as the finance lease rather than the operation lease and it has left less space for the operating lease.IFRS-16 require that the operating lease shall be straightly recognized in the statement of comprehensive income and it should not be recognized in the statement of financial position.
However, GAAP has no such exception for the operating lease and it is silent on such exception which is clarified by the IFRS. The business students and all those finance professional shall have at least the knowledge of IFRS and GAAP to run the business in efficient manner in a region where such rules applied.