Monday, 29 April 2013

GAAP Vs IFRS Similarities and Differences

As the U.S. market is increasingly going global, with capital providers from other countries, and also many investment opportunities abroad. There is a need for one set of accounting standards for all the companies in this growing global economy. One set of standards would allow companies and individuals to compare financial statements of companies located all over the world. There are two main sets of accounting standards I will focus on. There is US G.A.A.P. the acronym for the (generally accepted accounting principals), and IFRS an acronym for (international financial reporting standards). IFRS is the accounting standard in over 100 countries globally. To help US companies enter the global market, the SEC has to decide to adopt IFRS or to converge GAAP and IFRS. There are many similarities between GAAP and IFRS, and my paper will focus on some of these similarities and differences.
When it comes to financial statements there are many similarities between US GAAP and IFRS, which is a good thing, when converted or adopted financial statements will be pretty much the same for US and international accountants. Under both standards a complete set of financial statements include a balance sheet, an income statement and some sort of statement pertain to non operating incomes and expenses. When preparing these statements, both GAAP and IFRS require them prepared in the accrual basis (expenses and revenues are reported in the period they are incurred) as opposed to the cash basis. Both GAAP and IFRS require companies use the same policies of accounting that they did in the prior year, un less they disclose in their statement any new policies. Also companies are not required to prepare interim reports.
When dealing with inventory both IFRS and GAPP use cost as the basic accounting principal. Both standards have the same definition for inventory. Inventory is assets held for sale in the ordinary course of business or to be consumed in the production of goods or services. Both standards allow different cost method approach like standard cost method and retail method. Also under both standards costs of inventory includes direst materials, direct labor, and overhead, while selling costs and general administrative costs are not included.
There are also some key differences in inventory costing methods. With US GAAP the last in first out or "LIFO" method is an acceptable method, under IFRS it is not. Under IFRS the same cost formula must be applied to all inventories. With GAAP inventory is valued at lower cost or market cost. While under IFRS inventory can also be carried at lower of cost, or it can be priced at net realizable cost. Under GAAP inventories can't be written-down, under IFRS inventories are allowed to be written down under pre-determined circumstances.
The definition of long lived assets is similar under both US GAAP and IFRS. They both roughly define long lived assets as tangible assets held for use, to be used for more than one accounting period. Long lived assets are depreciated in GAAP and IFRS
Both GAAP and IFRS have a section for extraordinary items listed on the income statement. Extra ordinary items are material gains or losses that are both unusual and infrequent and not part of a company's continuing operations. Extraordinary items can vary by industry and region. With GAAP these extraordinary items are separately listed, while IFRS puts them with all the other gains and losses included with operations.
Property plant and equipment is treated similarly under GAAP and IFRS but not exactly the same. Both of their definitions state that property plant and equipment as a tangible asset, held for the use of producing or storing goods, or for rental to others, or for administrative purposes. They are expected to be used for more than one accounting period. They both value these assets at their initial cost and can use the same deprecation methods. Under GAAP the historic cost principal is applied, the value of these assets remains the same over their life. On the other hand with IRFS these assets can be re valued at year end if there is a material change in market cost. When the assets value is changed under IFRS the deprecation will have to be recalculated with the new value of the asset.
There are many obstacles to overcome to merge GAAP and IFRS or to just simply adopt IFRS, but it needs to be done. The differences create barriers to do international business. The inability to accurately compare and analyze financials of companies that use US GAAP and those who use IFRS slows down globalization. Investors and individuals will not seek to do business internationally, that is why one set of uniform standards is needed.

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