Question

List and discuss some limitations of the International Financial Reporting Standards (IFRS) and General Accepted Accounting Principles (GAAP). What organization(s) is responsible for creating and enforcing the IFRS and GAAP?

Answer 1

IFRS is short for International Financial Reporting Standards. IFRS is the international accounting framework within properly organize and report financial information.It is currently the required accounting framework in more than 120 countries.They specify how companies must maintain and report their accounts, defining types of transactions and other events with financial impact.

LIMITATIONS OF IFRS

• Not Globally Accepted :-

The United States has not yet adopted International Financial Reporting Standards and other countries continue to hold out as well. This makes accounting by foreign-based companies that do business in America difficult as they often have to prepare financial statements using IFRS and another set using American Generally Accepted Accounting Principles

• Manipulation of standards :-

There is a downside to the flexibility that IFRS allows: companies can utilize only the methods they wish to, allowing the financial statements to show only desired results. This can lead to revenue or profit manipulation, can be used to hide financial problems in the company and can even encourage fraud

• Increased Costs :-

A small company would be impacted by a country's adoption of IFRS in the same way a larger one would. However, small businesses do not have as many resources at their disposal to implement the changes and train staff.

• Not Rule based :-

Not being rule based, it may develop challenges at certain stages of implementation.

The Generally Accepted Accounting Principles in the US (US GAAP) refer to the accounting rules used in United States to organize, present, and report financial statements for an assortment of entities which include privately held and publicly traded companies, non-profit organizations, and governments.It is largely a rule-based body of standards

LIMITATIONS OF GAAP

• Difficult to Apply :-

It is not very easy to apply GAAP in day-to-day accounting practice since it is not only costly but also requires a lot of time for its applications. Small firms cannot afford it.

• Fixed Standard Principles :-

We know that while setting up a GAAP some fixed standard principles are taken into consideration which should strictly be followed by the firms. But the so-called fixed standard principles do not have any bearing as the business world is constantly changing.

• Proper Interpretation Not Always Possible :-

The GAAP which are set by a group of people/experts for proper evaluation of performances may create confusion regarding its meaning and this proper interpretation cannot be made under such circumstances, i.e., proper interpretation is not always possible.

• Knowledge of Accounting not Developed by the Accountants​​​​​​​ :-

Since accountants are to follow the standard principles and practices for maintaining accounts they do not find any interest in developing their knowledge of accounting in a better way. That is, personal knowledge and judgment are not improved.

What organization(s) is responsible for creating and enforcing the IFRS and GAAP?

• IFRS are created and enforced by the International Accounting Standards Board (IASB). They specify how companies must maintain and report their accounts, defining types of transactions and other events with financial impact .IASB is overseen by the Trustees of the IFRS Foundation, responsible for the organisation's governance, the appointment of IASB members and funding.​​​​​​​

• Generally accepted accounting principles (GAAP) are controlled by the Financial Accounting Standards Board (FASB), a nongovernmental entity.The Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its comprehensive set of approved accounting methods and practices.On the recommendation of the American Institute of CPAs (AICPA), the FASB was formed as an independent board in 1973 to take over GAAP determinations and updates.