IFRS and GAAP are the most popular reporting standards adopted by countries. These guidelines help in creating uniformity among accounting methods used in different companies and countries.
Accounting is an important activity to understand the financial health of an organisation and determines the business activities. The two most common accounting standards are IFRS and GAAP. If you are planning to opt for a certification course and are still deciding, this article will help you to make the right decision.
Table of Contents
Accounting standards are usually guidelines for accounting, usually set by a governing body, to help firms to present their income, expenses, assets and liabilities in a set standard method. Let’s discuss IFRS vs. GAAP.
|Conceptual Approach||Principle-based, with a thorough review of the facts pattern.||Rule-based, with a focus more on the literature.|
|Geographical Dominance in Usage||Used across more than 110 countries, including the European Union. Most popular standard globally.||Primarily used in the USA, though there is a shift towards IFRS in recent years.|
|Inventory Accounting Method||Only the FIFO method is allowed. LIFO is not permitted.||Both LIFO and FIFO methods are allowed.|
|Objectives of Financial Statements||Provides the same set of objectives for both business and non-business entities.||Provides separate objectives for business and non-business entities.|
|Development Costs||Can be capitalized.||Considered as expenses.|
|Inventory Reversal||If an inventory is written down, the write-down can be reversed in future periods if specific criteria are met.||Once inventory has been written down, any reversal is prohibited.|
What is IFRS?
IFRS (International Financial Reporting Standards) is a set of accounting standards developed by the independent, not-for-profit organisation, International Accounting Standards Board (IASB). It was done with a goal to provide a global framework for the preparation of financial statements rather than industries or organisations adopting their own methods. Currently, this method is used by organisations in more than 100 countries. At present, there are 17 different standards in IFRS.
- IFRS 1 First-time adoption of International Financial Reporting Standards
- IFRS 2 Share-based payment
- IFRS 3 Business combinations
- IFRS 4 Insurance contracts
- IFRS 5 Non-current assets held for sale and discontinued operations
- IFRS 6 Exploration for and evaluation of mineral resources
- IFRS 7 Financial instruments: disclosures
- IFRS 8 Operating segments
- IFRS 9 Financial instruments
- IFRS 10 Consolidated financial statements
- IFRS 11 Joint arrangements
- IFRS 12 Disclosure of interests in other entities
- IFRS 13 Fair value measurement
- IFRS 14 Regulatory deferral accounts
- IFRS 15 Revenues from contracts with customers
- IFRS 16 Leases
- IFRS 17 Insurance Contracts
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Features of IFRS
The following are the features of IFRS:
1. Fair presentation with IFRS: Fair presentation needs the faithful representation of the transaction effects and other events as per the definitions and recognition criteria for income and expenses, assets and liabilities that have been set out in the IFRS Framework.
2. Going concern: Financial statements are present on going concern basis until the management intends to liquidate the entity or it decides to cease trading, or it has no realistic alternative other than doing so.
3. Accrual basis of accounting: An entity shall recognise items as liabilities, assets, equity, income and expenses when they fulfil the definition and recognition criteria for these elements in the IFRS Framework.
4. Materiality and aggregation: Each material class of similar items should be presented separately. Items of dissimilar nature or function should be presented separately except if they are immaterial.
5. Offsetting: Offsetting is generally forbidden in IFRS except in certain standards that require offsetting whenever specific conditions are satisfied.
6. Frequency of reporting: IFRS mandates that at least a complete set of financial statements should be presented annually. However, generally listed companies also publish interim financial statements for which the presentation is as per IAS 34 Interim Financial Reporting.
7. Comparative information: As per IFRS, entities need to present comparative information in respect of the preceding period for all amounts that are reported in the financial statement of the current period. In addition to it, comparative information should be provided for narrative and descriptive information in case it is relevant to understanding the financial statement of the current period. The standard IAS-1 needs an additional statement of the financial position when an entity applies an accounting policy retrospectively.
What is GAAP?
Generally Accepted Accounting Principles (GAAP) is a set of accounting principles and financial reporting standards. Unlike IFRS, there is no universal GAAP standard. It varies from one geographical location or industry to another. GAAP was adopted by the U.S. Securities and Exchange Commission (SEC) and its principles are guided through 10 key concepts including:
- Principle of Regularity: Ensuring the accountant is adhering to GAAP rules and regulations as standard.
- Principle of Consistency: Accountants should keep consistency in applying the same standards in the entire reporting process. This consistency allows financial comparability between periods.
- Principle of Continuity: The assumption of business continuing to operate should be there while valuing the assets.
- Principle of Sincerity: Accountants should provide an impartial and accurate depiction of the financial situation of the company.
- Principle of Non-Compensation: Accountants should maintain transparency and include both positives and negatives. There should not be any expectation for debt compensation.
- Principle of Prudence: Financial data representation should be based on facts rather than being mere speculation.
- Principle of Permanence of Methods: Financial reporting should involve consistent use of principle to ensure comparability of financial information.
- Principle of Periodicity: Entries should be reported across appropriate periods of time.
- Principle of Materiality: Accountants are expected to remain transparent and disclose accounting as well as financial data in reports.
- Principle of Utmost Good Faith: As the name suggests, the principle expects parties to remain honest in all transactions.
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Is GAAP better than IFRS?
While comparing IFRS vs. GAAP for choosing one as your certification course, you must remember that it all depends on your geographical location and the industry you are in. If you are looking to work in the US or working for US-based organisations, GAAP is going to be the best one for you. Otherwise, IFRS is perfect as it is widely accepted across the world and a greater percentage of the organisations globally are adopting the IFRS standard.
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IFRS vs. GAAP: what is the difference?
IFRS and GAAP are both accounting standards. IFRS is a principle-based standard whereas GAAP is a rule-based standard. GAAP and IFRS have different treatments of inventory wherein the IFRS bans the' Last-in First-out' (LIFO) inventory method. On the contrary, GAAP allows Last in First Out. In certain conditions, IFRS permits inventory write down reversals whereas GAAP does not allow it.
What are the advantages of IFRS adoption?
IFRS adoption ensures that your financial statements are comparable with global competitors. IFRS standards contribute to economic efficiency since investors can identify risks and opportunities based on which they can allocate capital.
What are the disadvantages of converting to IFRS from GAAP?
First of all, the cost of IFRS adoption would be heavy and operations outside the US. Many outside the states will resist the IFRS adoption since they do not have market incentives for preparing IFRS financial statements.
Who is eligible for IFRS certification?
Anyone who fulfils one of the following eligibility criteria can opt for IFRS certification: Having 2 years of accounting experience as well as a degree compliant with ACCA qualifications, Holding ACCA certificate in International Financial Reporting with two years of accounting experience, Having 3 or more years of accounting related work experience or Holding ACCA affiliate status
Which professionals can go for the IFRS certification?
Following professionals can opt for IFRS certification: Finance professionals, Chief Accountants, Chartered Accountants and Company Secretaries. Semi-qualified ICWA, CS and CA with accounting based work experience. MBA Finance majors with work experience in the accounting domain.
What is the eligibility criteria to become a certified GAAP professional?
To become a Certified GAAP Professional, you need to pass the certification exam with a minimum of 50% score.
What are the four principles of GAAP?
GAAP is based on the four principles of objectivity, materiality, consistency and prudence.
What are the technical requirements for GAAP professionals?
GAAP professionals should be able to use project management and spreadsheet-based software. They should have experience with the usage of tax preparation software. Expertise in account reconciliation software platforms is also preferred.
Who can become GAAP certified professionals?
A GAAP aspirant should be a graduate in commerce and should be able to use accounting and spreadsheet software. Accounting professionals can also opt for GAAP certification.
Which courses are beneficial for GAAP certified professionals?
Following are the most beneficial GAAP courses that are available online: Financial Accounting for Corporations on edX Certificate Program in US GAAP on Ernst & Young Interpreting non-GAAP Reports on Wall Street Prep Advanced Accounting on Wall Street Prep.
Which one should you opt for between IFRS and GAAP?
The IFRS vs. GAAP choice is dependent on the country, organization and your interest. Most countries opt for IFRS standards but you should opt for GAAP if you are working for an organization that demands GAAP certification.
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