Question

Expert Q&A Done Which standard (GAAP or IFRS) presents a more fairly financial statement?

Answer 1

International Financial Reporting Standards (IFRS) is the accounting method that’s used in many countries across the world. It has some key differences from the Generally Accepted Accounting Principles (GAAP) implemented in the United States. As an accounting professional or business owner, it’s vital to know the variations of these accounting methods, in order to successfully manage your company globally, as well as domestically.

• Principles Based vs. Rules Based

A major difference between GAAP and IFRS is that GAAP is rule-based, whereas IFRS is principle-based.

With a principle based framework there is the potential for different interpretations of similar transactions, which could lead to extensive disclosures in the financial statements. Although, the standards setting board in a principle-based system can clarify areas that are unclear. This could lead to fewer exceptions than a rules-based system.Another difference between IFRS and GAAP is the methodology used to assess an accounting treatment. Under GAAP, the research is more focused on the literature whereas under IFRS, the review of the facts pattern is more thorough.

• As mentioned, the IFRS is a globally accepted standard for accounting, and is used in more than 110 countries. On the other hand, GAAP is exclusively used within the United States and has a different set of rules for accounting than most of the world. This can make it more complicated when doing business internationally.
• Consolidation — IFRS favors a control model whereas GAAP prefers a risks-and-rewards model. Some entities consolidated in accordance with FIN 46(R) may have to be shown separately under IFRS.
• Statement of Income — Under IFRS, extraordinary items are not segregated in the income statement. With GAAP, they are shown below the net income.
• Inventory — Under IFRS, LIFO cannot be used, but GAAP, companies have the choice between LIFO and FIFO.
• Earning-per-Share — Under IFRS, the earning-per-share calculation does not average the individual interim period calculations, whereas under GAAP the computation averages the individual interim period incremental shares.
• Development costs — These costs can be capitalized under IFRS if certain criteria are met, while it is considered as “expenses” under U.S. GAAP.
• A major difference between IFRS and GAAP accounting is the methodology used to assess the accounting process. GAAP focuses on research and is rule-based, whereas IFRS looks at the overall patterns and is based on principle.
• With GAAP accounting, there’s little room for exceptions or interpretation, as all transactions must abide by a specific set of rules. With a principle-based accounting method, such as the IFRS, there’s potential for different interpretations of the same tax-related situations.
• Finally, one of the main differentiating factors between IFRS and GAAP is 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, with the exception that decisions cannot be made on the specific circumstances of an individual