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Difference Between GAAP and IFRS

Jan 19th, 2011 | By Andrew

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.
GAAP
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.
IFRS
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.
Differences:
(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.

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Eric Cassel

11/21/10

Gaap vs. IFRS

For many years now there has been a struggle to converge both the
generally accepted accounting principles (GAAP) and international
generally accepted accounting principles (IGAAP), which is also
known as the international financial reporting standards (IFRS). For
the most part they are very similar however do have a few key
differences that need to be addressed. The mission to converge US
GAAP with IFRS had begun in 1988 when the Security and
exchange commission (SEC) first made a motion to establish
worldwide accounting principles that were the same.

Generally accepted accounting principles were developed over the


past 60 years and are so in depth there are over 2,000 documents
to contain all for the information. GAAP consists of things such as
the Financial Accounting Standards Board (FASB), the Accounting
Principle's Board (APB), Accounting Standards Executive Committee
(AcSEC), as well as many other accounting principles.

One major difference is the cash taxes, which could seriously effect
international business and seriously effect the way some
companies do business. IFRS does not permit one to use last in
first out method to cost inventory and would have to cost items at
actual cost. This could hurt many small companies when tax season
comes around. This is switching over but it will be a several year
process. As it is stated that the earliest the SEC would even allow
public companies to converge would be 2015. Currently there are
more then 100 countries that are required to use the IFRS.

Another major difference which effect company value is the


measurement of long-term assets. IFRS allows you to measure
assets at fair value instead of book value. This goes for assets such
as property, plant, and equipment. This would allow a company to
either raise or lower values however it deems fit. It could also alter
debt to equity as a company could over value assets so that it
seems as if it is a more valuable company. It could give many
companies too much freedom if they are not honest.

International Financial Reporting Standards also allows a single step


write-down method, which differs from the two-step method
currently accepted by the US Generally Accepted Accounting
Principles. It would make it easier for a company to write off items a
lot more often then usual. This would lower the taxes paid by a
company due to the fact that a lot more would be written off.

One major problem with conversion would be the education process.


All current accountants would need further education in the new
method that would be required by the IFRS. The CPA exam would
also need to be re-designed to include new sections and alter some
of the current ones that exist. All the work required for the change it
as well as the work required to re-educate is one of the big factors
preventing it all to change.

The convergence process had begun back in 2001 when the


International Accounting Standards Board (IASB) was created to
help with the process. Next in 2002 the IASB created an agreement
to develop an accounting process that would create standards that
would work for both in country finance reporting as well as
international. In 2005 the SEC announced that foreign companies
could report finances using the IFRS instead of US GAAP. In 2008
the SEC created a roadmap that would explain how and when the
IFRS would become implemented into the US financial reporting
system. Then in 2009 the IASB finishes its set up of a roadmap and
finds out what amendments need to be made to the current US
GAAP to make it to the IFRS. By 2012, Mexico, Canada, India, and
Japan should be converted to IFRS with us joining in 2015.

The Convergence to the IFRS is a long slated process however it has


come a long way since 2002 when the process first started. There
are a few key differences explained above that are being worked out
by the IASB and the ways to fix it have been determined. When it is
finally completed it will make accounting worldwide and international
companies much easier to do business.

Citations:

1. Kieso, Donald E., Jerry J. Weygandt, and Terry D. Warfield. Intermediate


Accounting. Hoboken, NJ: Wiley, 2010. Print.

2. Plumlee, Marlene. International Financial Reporting Standards. Boston:


Prentice Hall, 2010. Print.

3. AICPA | Www.IFRS.com - International Financial Reporting Standards


Resources. Web. 22 Nov. 2010. <http://www.ifrs.com/>.

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US GAAP vs. IFRS


Difference in the treatment of dividend and interest
Under U.S. GAAP, SFAS 95:

Dividends paid by a company to its shareholders are classified on the cash flow
statement under cash flow from financing.

The dividends received by a company from its investments are classified as cash
flow from operations.

All interests received and paid by or to a company are classified as cash flow
from operations.

Under IFRS:
Dividends paid by a company to its shareholders, dividends received by a
company from its investments and all interests received and paid by or to a
company can be classified as either cash flow from financing or cash flow from
operations.

IFRS U.S. GAAP

Cash Flow from Financing or Cash Flow from


Dividends paid by a company to Operations Fina
shareholders ncin
g

Cash Flow from Financing or Cash Flow from


Dividends received by a company Operations Ope
from investments rati
ons

Cash Flow from Financing or Cash Flow from


All interest received and paid by or to Ope
Operations
a company rati
ons

Other Difference between IFRS and US GAAP


IFRS U.S. GAAP

Inventory LIFO is allowed LIFO is allowed

LIFO is allowed; LIFO is


allowed
Recovery of value is ;
allowed if certain criteria
Inventory are met. Recover
y of
value is
NOT
allowed

Upward revaluation is Reporte


allowed; d on
balance
The increase in value is sheet
Property and reported in the income at
E statement to the extend original
q of previous downward cost
u valuation. Otherwise it is less
i reported as a direct accumu
p adjustment to equity. lated
m depreci
e ation;
n
t Upward
revalua
tion is
NOT
allowed
.

Intercorporate Use voting control % to determine the need Use voting control % and
i of consolidation: economi
n c control
v Less than 20% (no significant to
e influence)=> market determi
s method; ne the
t need of
m 20%-50% (Significant consolid
e influence) => Equity ation
n method;
t Less
More than 50% (Control) => than 20%
Consolidation; (no
significa
Shared (Joint control) nt
=>Proportionate influenc
consolidation* or equity e) =>
method; market
method;
*Proportionate consolidation
- report pro-rata share of 20%-50%
the assets, liabilities and (Signific
net income of the investee. ant
influenc
e) =>
Equity
method;

More
than 50%
(Control
) =>
Consolid
ation;

Shared
(Joint
control)
=>
equity
method;
Proporti
onate
consolid
ation is
not
permitte
d.

Not systematically
amortized but subject to
an impairment test at
least annually.

The timing of impairment


judgment of goodwill can
be used to mange
earnings

Analyst can make


adjustments:
Goodwill
Deduct goodwill when computing
ratios;

Exclude goodwill impairment


charges ;

from income statement when


analyzing trends;

Evaluate acquisitions in terms of the


price paid relative to the earning
power of the acquired assets.

Identification Reported on the balance Same


i sheet at acquisition cost reportin
n less accumulated g as
t amortization; IFRS.
a
n The costs of internally Do NOT
g developed intangibles are permit
i generally expensed as upward
b insured; revalua
l tions
e Do allow upward
revaluations.
a
s
s
e
t
s

Non-financial liabilities that are uncertain Use contingency


about their timing and instead
Provision amount. of
provisi
on