Accounting is defined as "the process of communicating financial information about a business entity to users such as shareholders and managers." Financial statements include income statements, balance sheets, and statement of cash flows. As one could image, there are many aspects that can go wrong in this process. Standards of these financial statements had to be set. Depending on the company or the accountant, one may use the generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS). There are some differences between these considering the United States primary uses GAAP while internationally one may use IFRS.
GAAP has been set by the American Institute of Certified Public Accountants with regulations. The board was first created in 1939 with different names. In 1973 it was named in which we now know as the financial accounting standards board (FASB). Anyone on the board is required to leave if a statement would lead to misleading information about the company itself. Organizations such as the United States Securities and Exchange Commission, American Institute of Certified Public Accountants, Financial Accounting Standards Board, and Governmental Accounting Standards Board have influence on the development of GAAP in the US.
GAAP consists of five basic principles. The principle of regularity enforces rules and laws. The principle of consistency says that a business will follow their fixed method all throughout their similar items. According to the principle of sincerity, the statements should reflect the real financial information about the company. The principle of permanence of methods allows the contrast of the financial information. Materiality concept depends on the state and size of an item. Items will only be considered material if it affects a set of accounts.
IFRS are made to make company accounts understandable internationally. IFRS began as the International Accounting Standards (IAS) that began in 1973 by the board of international accounting standards committee (IASC). In April 2001, the IASC board's first meeting continued to develop standards that became the IFRS. IFRS are used across worldwide. Many countries that use IFRS include the European Union, India, Hong Kong, Australia, Malaysia, Pakistan, Russia, South Africa, Singapore, and Turkey. In August 2008 it was reported more than 113 countries require IFRS reporting.
The list of the standards continues to go on and on about anything one could think of. The IFRS does authorize three basic accounting models. These models include current cost accounting, financial capital maintenance in nominal monetary units, and financial capital maintenance in units of constant purchasing power. All three consider the possibility of inflation and deflation. Like the GAAP, IFRS relies on the materiality and realistic representation of the financial statements.
As it was stated, there are some differences between these two standards. It was stated in an Accounting Today article by Barry Jay Epstein two terms used could be debatable. The statement was said, "It is probable that the temporary difference will not reverse in the foreseeable future." When it comes to the IFRS the term probable is used twenty eight times in the standard and is generally used for greater than fifty percent when an event is more likely than not to occur. The percentage is high for the GAAP as well, but it has a probability of eighty five percent or greater. With these definitions, the IFRS standard shows a lower onset for non-accrual tax obligations than GAAP. As the term "foreseeable future" is stated, this implies a larger timeline under IFRS than GAAP. This makes it simpler for management to declare earnings in the foreseeable future under IFRS than it would be to have the objective to reinvest these earnings aboard according to GAAP.
According to publication published by the PWC website, there is a difference when it comes to revenue recognition between GAAP and IFRS. GAAP guidance is widespread. However, it focuses on revenues being realized and earned. It states revenues should not be cognized until an exchange has occurred. This is a general concept as the standards are very detailed. IFRS say two primary revenues standards confine all transactions within four categories that include sale of goods, rendering of services, others' use of entity's assets, and construction contracts. These categories clued the probability that the benefits associated with the transaction will flow to the entity and can be measure reliably. Additional recognition criteria are applied within each of the categories.
Ernst and Young state the difference between GAAP and IFRS when it comes to inventory in a publication on "financialexecutives.org". Noteworthy differences include costing methods, measurement, and reversal of inventory write-downs. GAAP says LIFO (last in, first out) is an acceptable method, as IFRS says LIFO is prohibits. Same cost formula must be applied to the inventories as it is not required in GAAP. Inventory is carried at the lower of cost or market in GAAP. IFRS says inventory is carried at the lower of cost or net realizable value. Any write-downs to the lower of cost or market make a new cost basis that cannot be reversed in GAAP. IFRS says previously recognized impairment losses are reversed up to the original amount.
The generally accepted accounting principles and international financial reporting standards may have the general concepts in common, but they also have major details in difference. Because the IFRS is used internationally, one could assume there are going to be differences, considering accounting is all based around money when internationally we do not use the same currency. The list goes on and on between the differences. The boards are currently trying to merge the two standards together to make it simpler on the accountants.
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