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Which is better GAAP or IFRS

Updated on April 9, 2018

Which is Better GAAP or IFRS ?

Which is better GAAP or IFRS?

Nick Caruso

The United States is moving towards a global economy. U.S. Companies prepare their financial statements using Generally Accepted Accounting Principles (GAAP) while the rest of the global economy uses the International Financial Reporting Standards (IFRS). As a future accountant, I believe that it is important to know the differences between each accounting method so I can review a U.S. company financial statement using IFRS and GAAP. A review of these two accounting methods will assist in the discovery of the most accurate method.

IFRS is the accepted accounting standard in over 110 international companies while GAAP is primarily used in the United States. The fact that GAAP has rules unlike the rest of the financial accounting world makes it difficult when working with international companies (Firm of the Future). There are a number of differences between IFRS and GAAP; GAAP’s central point is research and is based on rules; IFRS views the process and stands on principle. What does this mean? It means GAAP has a small margin for exceptions or explanation because all entries or transactions must follow the rules. IFRS allows for interpretation of the transactions while GAAP requires an accountant to follow the rules (Firm of the Future).

Inventory methods between IFRS and GAAP differ as well; GAAP has the ability to use First in First Out (FIFO) and Last in First Out (LIFO) while the IFRS method does not allow for the use of LIFO (Forgeas). IFRS principles do not look at LIFO as a precise stream of inventory and lead to the report of flat income (Firm of the Future).

IFRS allows a company to capitalize their developmental cost, however; they must meet specific specifications. The IFRS capitalization allows a company to support depreciation on fixed assets. GAAP does not allow for capitalization and the cost must be expensed in the year they are paid (Firm of the Future).

The acquisition of intangible assets shows why IFRS is looked at as a principle-based method. GAAP looks at intangible assets at their fair value and IFRS only looks at the asset if there is a positive financial outlook for the company (Nguyen). Another key area is discontinuing operations; the disposal of and or sale of company assets. GAAP rules indicate that a business report discontinued operations on their financial statements under two circumstances: a) Resulting elimination – if the asset is sold or disposed of and is completely taken out of company operations, b) continuing involvement – when the asset is completely discarded and there is no other participation by the company concerning the asset. The appearance of these two conditions will require the company to list on the income statement the result of the asset in the present or previous periods; these notations are required to be listed in a discontinued section (Nguyen). IFRS method looks at discontinued operations in a different light. IFRS principles discontinue property based on the following: a) The asset has been sold or discarded. b) The asset is considered a different line of business or another section of operation; the asset is part of a plan to disconnect the line of business in question. IFRS allows for the classification of the investments as “held for sale,” this classification is not available on GAAP. IFRS is also required to issue a discontinued operations section on its income statement (Nguyen).

GAAP and IFRS have differences and similarities but mostly differences. This paper discussed a number of differences. IFRS is used internationally while GAAP is a United States base method of accounting. The differences in the two methods could cause difficulty when trying to compare financial statements of similar companies that use different methods. IFRS tends to use market value and GAAP uses cost when valuing an asset. GAAP has two options within the inventory method; FIFO and LIFO whereas IFRS does not consider LIFO a viable option. Each method looks at intangible assets differently; GAAP has a fair value and IFRS looks for a positive financial outcome. The differences listed above do not represent all of the differences. Of these two methods, one is not better than the other, they are just different.

Works Cited

“IFRS and GAAP Accounting: Top 10 Differences & Effects on Business.” Intuit, www.firmofthefuture.com/content/top-10-differences-between-ifrs-and-gaap-accounting/.

Forgeas, Remi. “Is IFRS That Different From U.S. GAAP?” AICPA IFRS Resources, 16 June 2008, www.bing.com/cr?IG=FBCEE9CC5A0F474BB4BC87BA74F1A6F1&CID=0CA68156550A638C22AD8AFF54A562F9&rd=1&h=Z2yBfCx6JJJNP9vXX_M-69NUrQszBohrRjQFIaTR1V0&v=1&r=https%3a%2f%2fwww.ifrs.com%2foverview%2fGeneral%2fdifferences.html&p=DevEx,5068.1.

Nguyen, Joseph. “What Are Some of the Key Differences between IFRS and U.S. GAAP?” Investopedia, 23 Mar. 2018, www.investopedia.com/ask/answers/09/ifrs-gaap.asp.

© 2018 Nick Caruso

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