International Financial ReportingStandards (IFRS) is an accounting concept that is used in many countries of theworld.
IFRS are the principles/practices that regulated companies are requiredto use in reporting accounting information in financial statements. Generally AcceptedAccounting Principles (GAAP) is used in the United States to measure and reportrelevant and representationally faithful financial statements to investors andcreditors in the same sense that other countries use IFRS (Wahlen). Even thoughthese two accounting methods are used in the same sense they have kaydifferences from each other. As an accounting, professional or business ownerit is vital to know the key variations that come with different accountingmethods to successfully manage a company/business globally (Firm of The FutureTeam).
One difference between theaccounting methods GAAP and IFRS is the difference between rules andprinciples. The policy used to assess the accountingprocess., GAAP focuses on research and is rule-based, whereas IFRS looks at theoverall patterns and is based on principle. With GAAP accounting, there’slittle room for interpretation all transactions must stand by a specific set ofrules. With a principle-based accounting method, such as the IFRS, there’spotential for different interpretations (Firm of The Future Team).
This as you can insight from the information provided it amajor difference between the two methods and could have a dramatic effect ifnot followed properly. Another major difference between the two accountingmethods is the quality characteristics and how the accounting methods function.GAAP works within a ladder of characteristics, such as relevance, reliabilityand understandability, to make informed decisions based on specific circumstancesof an individual. IFRS also works with the same characteristics, with theexception that decisions cannot be made on the specific circumstances of anindividual (Pricewaterhousecoopers).
When it comes the Income statements under IFRS,extraordinary items are included in the income statement. Meanwhile, underGAAP, they are separated and shown below the net income portion of the incomestatement. The difference in methods when it comes to Liabilities theclassification of debts under GAAP is split between current liabilities andnoncurrent liabilities. With IFRS, there is no differentiation made between theclassification of liabilities, as all debts are considered noncurrent on thebalance sheet (Wahlen).
The Firm of the Future also notes that when it comes to intangible assets, such asresearch and development, IFRS accounting stands out as a principle-basedmethod. It takes into account whether an asset will have a future economicbenefit as a way of assessing the value. Intangible assets measured under GAAPare recognized at the fair market value and nothing more. When it comes tofixed assets, such as property, furniture and equipment, companies using GAAPaccounting must value these assets using the cost model.
IFRS allowsa different model for fixed assets called the revaluation model. Thetwo different methods have a much different way of recording basic accounttransactions which is another example of how differently the two methods areand how understanding the difference is vital in understanding global business. As you can tell there are many other differences betweenthe methods that must be accounted for when doing business. It’s important toreally understand these differences between IFRS and GAAP accounting, so that acompany/business can accurately do business internationally. U.S.-based companiesmust abide by specific accounting regulations, even if they plan to do businessinternationally.