There are many financial reporting frameworks used over the globe for preparation of financial statements. Some frameworks are specific to some countries or regions and some are internationally accepted and used. Accounting profession is regulated by the international federation of accountants (IFAC) all over the world. International accounting standards board (IASB) that is part of IFAC, issues the international accounting standards (IASs) and international financial reporting standards (IFRSs).
Definitions and meanings
International Financial reporting Standards (IFRSs)
IFRSs are the international financial reporting standards issued by international accounting standards board (IASB) that aim to enhance the harmonization between financial accounts of various business organizations. Previously IASs were issued that allowed benchmark accounting treatment for measuring all the elements of financial statements but also allowed an alternative treatment. This was causing problems in comparing results between different entities using different accounting treatments. Due to this there was need to improve the harmonization across the businesses to reduce the number of accounting treatments allowed. This was done in the form IFRSs and each IFRS allows only one accounting treatment for measurement of elements of financial statements. All the IFRSs issued by IASB are principle rather than rules and therefore professional accountants’ judgment is also important in applying these standards.
Generally accepted accounting principles (GAAP)
Generally accepted accounting principles (GAAPs) refer to common set of principles that are used to prepare financial statements by companies. It helps improve the clarity and presentation of financial statements by providing guidelines about how to present elements of financial statements. All the requirements of GAAPs are rules that require mandatory compliance by the reporting entities unlike IFRSs that are principles and may change according to circumstances.
Difference between IFRSs and GAAPs
The main points of difference between IFRSs and GAAPs are explained below:
1. Legal form
IFRSs are principles and may change according to circumstances whereas generally accepted accounting principles (GAAPs) are rules which can be legally enforced.
IFRSs are applicable globally and almost all the businesses around the world follow it whereas GAAPs are local and are only used within United States. Accounts prepared under IFRSs are therefore more comparable with among international organizations and multinationals.
3. Inventory valuation
There are three methods for inventory valuation known as first in first out (FIFO), last in first out (LIFO) and average cost method (AVCO). GAAPs allow all three methods for inventory valuation whereas IFRSs disallow LIFO method for valuing inventories.
4. Reversal on inventory write downs
If inventory value is written off in income statement and subsequently its value increases it is known as reversal of inventory write off. IFRSs allow reversal of inventory write off if its value increases in subsequent periods whereas GAAPs do not allow any such reversal in inventory valuation.
5. Development costs treatment
IFRSs allow the capitalization of development costs if it meets certain criteria. Otherwise these costs are expensed out. GAAPs do not allow capitalization of development cost under any circumstances and allow only recognizing it as an expense.
6. Non-current assets valuation
Under IFRSs non-current assets can be valued at cost model (cost less accumulated depreciation) or revaluation model (revalued amount less subsequent accumulated depreciation) whereas GAAPs only allow measurement under cost model
From above discussion it is clear that IFRSs are applicable internationally whereas GAAPs is applicable in US only. Accounting treatments under IFRSs normally change according to changes in circumstances whereas GAAPs do not account for any changes in circumstances. Both reporting framework also provide different measurements methods for items of financial statements.