GAAP Vs IFRS
GAAP stands for Generally Accepted Accounting Principles, and IFRS stands for International Financial Reporting Standards. GAAP is normally used mainly in the United States, while IFRS is used in other countries around the world. More than 100 countries use IFRS, while the United States are the only ones who use GAAP. This means that if you are going to business overseas it is important to know how IFRS works. There is a lot that goes into GAAP and IFRS, and this article will just focus on asset accounts, liability accounts, equity and financial statements.
There are some similarities between the two and one is that they are both based on the principle that cost is the primary basis of accounting. Both GAAP and IFRS define inventory the same way, which is the amount of good or materials a company has. In both the cost if inventory consist of direct expenditures to inventory ready for sale, allocable overhead, but selling costs are excluded. A similarity for financial statements is that they are all the same; whether it is under GAAP or IFRS they both have a balance sheet, income statement, a statement of cash flows. In addition to that both methods require the statements to be prepared on an accrual basis. For both GAAP and IFRS you have to amortize the life of intangible assets, but goodwill is never amortized. Also when it comes to intangible assets research costs are always expensed. When doing cost measurement they are also similar whether using the standard cost method or the retail method. Another similarity between the two is the definition of a debt. To reduce paid-in-capital, both request issuing cost, and they both account for par, no par, and state value exactly the same.
Although there are some of similarities between the GAAP and IFRS for inventory, there are more differences. One is using LIFO (Last in First Out), which is not allowed in IFRS. When it comes to looking at intangible assets for resale they will not be included in GAAP, but will be in IFRS. When it comes to write-downs, which is where they reduce the recorded value of an asset, either by estimate or as a plan, a new cost basis is established when using GAAP, and reversal write-downs are prohibited. When looking at IFRS they are when the reason for the write-down no longer exists or when there is a change in economic circumstances indicate an increase in the net realizable value in the inventory. A few differences between GAAP and IFRS when it comes to intangible assets is development costs are only expended under GAAP and IFRS come of development costs are capitalized. Only in IFRS are intangibles allowed to have infinite lives and are carried at fair value, with the exception of goodwill.
With cash and cash equivalents GAAP does not outweigh bank overdrafts against other cash accounts, while in companies that use IFRS do. With receivables GAAP trade receivables other receivables and loans from related parties are not allowed to be combined. For IFRS it is acceptable and is known as provision. In property plant, and equipment interest needs to be capitalized under GAAP. When looking at certain financial instruments like preferred stock GAAP places it in equity, while in IFRS it goes under liabilities. The big difference between GAAP and IFRS under stockholder’s equity is the terminology used. For example under GAAP it is called common stock, while under IFRS it is share capital. Also what is known as paid-in-capital in excess of par under GAAP is it called share premium under IFRS.
Under IFRS a third balance sheet is required at the beginning of a period where there is an application of a new accounting policy. On the income statement for extraordinary items there is a restriction on items that are unusual as well as infrequent under GAAP. On IFRS extraordinary items are prohibited. Also under income statement there is not actual requirement to classify the items under the income statement by function or nature, but under Security and Exchange Commission (SEC) registrants it is normally required to classify them by function. Under IFRS they may classify items under function or nature, and if classified under function disclosures about the nature of the expense has to be included as well.
Companies around the world will have to find a way to blend their methods to make it easier dealing with companies in different countries. Or have all companies change to one GAAP or IFRS, because doing business in with a company that does not use the same method as you can get an accurate number of how much a company is making, and spending. As well as how much a company has in its inventory.