The Similarities and Differences Between The GAAP and The IFRS

Why is it that the United States chooses to use the Generally Accepted Accounting Principles instead of the International Financial Reporting Standards that more than 110 countries across the world use today? Although both of these accounting standards have many differences, they also have many similarities as well. The countries that use the International Financial Reporting Standards believe that this is what works best for them.

The United States Securities and Exchange Commission are hoping to be able to make the switch over to the IFRS like the majority of the other countries use in the near future. The International Financial Reporting Standards were created to be common language for business affairs to be able to communicate with one another on an international level. This main purpose was because they would all have the same understandings and would be able to relate and be comparable on a business level.

One of the major differences between the Generally Accepted Accounting Principles and the International Financial Reporting Standards is that the GAAP is considered to be more “rules based” where the IFRS is thought to be more “principles based”. The GAAP has different objectives of their financial statements for business entities and non-business entities where the IFRS does not. The IFRS has only one objective of their financial statements for all of the different types of entities. One thing that stands out when it comes to financial statements for those that go by the International Financial Reporting Standards is that they do not require their financial statements to include a statement of comprehensive income, where that is one of the main things that the Generally Accepted Accounting Principles require their financial statements to include. The IFRS framework’s definition of an asset differs from the definition that the GAAP framework gives to an asset.

The International Financial Reporting Standard framework defines an asset as “a resource from which future economic benefits will flow to the company” (Ball). The Generally Accepted Accounting Principles framework defines an asset as “a future economic resource” (Lambert). Another major difference between the two is the treatment of fixed assets. Under the GAAP, fixed assets are valued by using the “cost method” where the IFRS uses a different method which is known as the “reevaluation method”. The cost model is based on the historical value of an asset where the reevaluation method is based on the fair value. The GAAP requires companies to disclose information about the choices that they make about their expenses in footnotes. The IFRS does not find this necessary. The differences between the Generally Accepted Accounting Principles and International Financial Reporting Standards are not necessarily that big of differences; however, there are many differences that make the International Financial Reporting Standards more understandable and able to be used by all of the different countries.

Although the International Financial Reporting Standards and the Generally Accepted Accounting Principles have many differences they also have some similarities as well. They both require their financial statements to include balance sheets, income statements, footnotes, cash flow statements, and changes in equity. They also both require that balance sheets separate their current assets and liabilities from their non current assets and liabilities (Ball). The IFRS and GAAP also have many similar characteristics. They both are known for relevancy, reliability, how comparable they are and how they are able to be understood (Lambert). The Generally Accepted Accounting Principles and the International Financial Reporting Standards both provide relevant information to a wide range of stakeholders.

The United States needs to put a lot of thought into why it is or is not best to adopt the International Financial Reporting Standards over continuing to use the Generally Accepted Accounting Principles. This will be a transition that will take a little bit of time to get used to the changes but overall it seems to be the best choice.

The United States will be able to communicate better by having the financial statements all the same so that we will have the same understanding that the 110 other countries all have. After adopting the IFRS the United States will hopefully be able to develop the “going concern” assumption better since it is not currently developed well in the Generally Accepted Accounting Principles framework (Daske). There are many positives that will come from choosing The International Financial Reporting Standards if it is adopted by the United States.

Author: MixoBiz

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