Standards which regulate financial accounting and reporting will vary from one country to another. In the USA, for instance, practices of financial reporting are laid down by the FASB (Financial Accounting Standards Board) and are organized within the GAAP (generally accepted accounting principles) mechanism. This refers to a set of commonly accepted principles of accounting, standards and other processes which are followed by accountants and organizations when financial statements are being compiled.
What is IFRS?
IFRS (International Financial Reporting Standards) represents a set of global accounting standards, stating how specific transaction types and other events should be reported in financial statements. IFRS is issued by the IASB (International Accounting Standards Board) and they specify exactly how accounts must be reported and maintained by accountants. IFRS was set up for ensuring a common language for accounting thereby ensuring that business/accounts may be understood across countries and companies with ease. IFRS has been adopted by 144 countries worldwide and although the SEC (Securities and Exchange Commission) has already stated its intentions to switch to IFRS from GAAP, things may still take more time to manifest.
IFRS aims at maintaining full transparency and stability in financial reporting. It is standard for the EU (European Union) along with several Asian and South American countries although the USA does not have it as standard yet.
What is GAAP?
GAAP should be followed whenever the financial statements of a company are distributed outside of the company. If there is public trading of a company’s shares/stocks, financial statements should follow regulations that have been established by the Securities and Exchange Commission. GAAP takes into account major aspects like balance sheet, revenue recognition, item classification and outstanding share measurements. Some companies may go by both GAAP and non-GAAP compliant initiatives when financial results are being reported.
Major differences between IFRS and GAAP
The key difference between GAAP and IFRS is that the former is based on rules and the latter is based on principles. This difference is outlined through various interpretations and details. The guidelines for IFRS offer lesser details overall in comparison to GAAP. The theoretical principles and framework of IFRS gives more room for suitable interpretation and may need sizable financial statement disclosures. The intuitive and consistently occurring IFRS principles are sounder from a logical standpoint and may offer superior representation of the economics governing all business transactions.
The biggest difference between IFRS and GAAP is that inventory treatment is considerably different. IFRS regulations put a ban on usage of last-in and first-out or LIFO inventory accounting methodologies. GAAP regulations enable LIFO. Both systems take into account the FIFO (first-in, first-out) methodology along with the weighted average cost system. GAAP does not enable reversals of inventory while IFRS allows the same under specific conditions. GCC Filings is your best VAT solution in the UAE when it comes to auditing, accounting, company incorporation, VAT registration, filing and more.