GAAP vs IFRS
GAAP vs IFRS GAAP and IFRS are two of the accounting rules and guidelines that regulate the financial reporting standard. All over the world, different procedures for computing financial results of companies are being observed which are known as their versions of GAAP or local GAAP. This is nothing but generally accepted accounting principles that are followed in various parts of the world. The US GAAP is the one followed by the Accountants for the financial reporting of the companies in US. As there are different versions of GAAP in different countries, The International Accounting Standards Board (IASB) has been advocating a system of accounting that is same across the globe. This system of accounting is known as International Finance Regulation Standards or IFRS.
As described above, GAAP is the framework within which accountants in any country record and summarize transactions, and present them in financial statements. These are the sum total of accounting standards that are used in any country reflecting conventions, rules and guidelines regarding preparing financial statements of any organization. GAAP is not a single, but a framework of rules that are followed by chartered accountants and accounting firms to prepare and present incomes, expenses, taxes and liabilities of individuals and companies.
Presence of GAAP ensures that financial reports of different companies can be compared and analyzed without any ambiguity and this is a major advantage to Banks, financial experts and tax officials and even to share holders and potential investors who can compare the results and decide upon better performing companies.
As the economy has become global and with emergence of multinationals, it often becomes confusing for the parent company to assess the performance of its subsidiary operating in another country as accounting principles are different in both the countries. This difference in accounting leads to many grouses especially pertaining to taxation. Thus International Accounting Standards board has taken upon itself to develop guidelines for accounting that are applicable in every part of the globe. IFRS is a set of guidelines for accounting that is being encouraged by IASB and the objective is to ensure that gradually all countries progress towards IFRS. Much has been done in the last few decades but a lot still needs to be done.
Difference between GAAP and IFRS
Like all other countries, the US is trying to change and switch over the guidelines set under IFRS for accounting from its present accounting principles known as GAAP. Though there are many similarities between the two, there are glaring dissimilarities that need to be bridged so that accounting is finally same in all parts of the world. Let us have a look at some of the major differences between the two.
(1) When it comes to inventory measurement, GAAP assumes that its value is to be ascertained on the basis of FIFO, LIFO and weighted average method but IFRS does not permit using LIFO for the value of inventory.
(2) Where services are provided, GAAP only takes money as revenue and does not take into account any pending service. But if IFRS is being used for accounting, even part services can be converted into revenue. If it is not possible to calculate revenue, IFRS makes use of zero profit method.
(3) In construction business, GAAP allows for recognition of contract if it is not completed and it can be shown in the financial results. But in IFRS, though it recognises the % of completion method, gross profit approach of % completion is not allowed.