IFRS or GAAP - This is one among the most heated topics in the world of accounting. Along the passing years, IFRS has gained a lot of popularity and most of the countries are adopting it over the latter. But you needn’t worry about it. Making choices is hard but by the time you finish this article you will have a clear vision about both of these systems.
What is IFRS?
It is a universally adopted method of financial reporting. Earlier it was called as international accounting standard (IAS). This standard is utilized to prepare and present the financial statement i.e. income statement, changes in equity, footnotes, balance sheet. It certifies comparability and understandability of the international business. Its sole aim is to provide its users with information related to the financial position, liquidity, and profitability of the company, performance and to help them make rational economic decisions. Today, nearly 120 countries have adopted it. Adopting IFRS has made the presentation of financial statements easier than ever
What is GAAP?
GAAP refers to the standard framework, principles, and procedures used by the various companies for financial accounting. It consists of standardized methods and rules for reporting and recording the financial data i.e. income statement, balance sheet, cash flow statement, etc. This framework is adopted by a majority of the public trade companies and private companies in the United States. This framework provides transparency and consistency in the financial statements. The information provided by this framework is of great use and is helpful for making important economic decisions by the investors, creditors, shareholders, etc.
Major differences:
- GAAP stands for generally accepted accounting principles whereas IFRS stands for international financial reporting standard.
- GAAP is basically a set of accounting guidelines and procedures used in preparing statements by various companies.
- On the other hand, IFRS is a universal business language which is used by the companies while getting their financial statements recorded.
- The Financial Accounting Standard Board (FASB) and International Accounting Standard Board (IASB) issues GAAP and IFRS respectively.
- Usage of last in first out (LIFO) is only allowed in IFRS.
- in the case of development cost, the GAAP considers it as an expense but in IFRS the cost is capitalized provided the mentioned conditions are met.
- Inventory reversal is allowed only in IFRS but only when certain conditions are met.
- IFRS and GAAP are based on principles and rules respectively.
