ACCOUNTING

Accounting: Differences between GAAP and IFRS Standards

Accounting: Differences between GAAP and IFRS Standards

Introduction

The rationale of this paper is to highlight the main differences between the most widely known accounting principles, GAAP or Generally Accepted Accounting Principles, and IFRS or International Financial Reporting Standards. The paper will also discuss the best accounting strategy that should be adopted by a firm in order to operate effectively, and efficiently with in the accounting standards prescribed for a firm.

The rules and regulations for both IFRS and GAAP are set by International Accounting Standards board or IASB, an international entity, which is headquartered in London, and Financial Accounting Boards or FASB. The set standards are recognized by both American Institute of Certified Public Accountants (AICPA), and by Securities and Exchange Commission (SEC) (Forgeas, 2008).

By 2005, most of the publically traded businesses in the European Union were requisite to implement IFRS as their financial reporting standard. This accounting standard is now adopted in more than 110 countries around the globe, and has major differences when compared to GAAP. IFRS at the theoretical stage is known as the principle based bookkeeping standard in contrast to GAAP. The accounting standard of United States or GAAP is more of a rule based approach (Phillips, 2010).

This means that by being more principle based, IFRS has an upper hand, because it characterizes and margins the financial side of the business, as compared to the rule based approach. The IFRSs are expected to replace nationalized principles of individual states, comparable to, the USGAAP (US Generally Accepted Accounting Principles) in the USA. IFRSs are harmonized international bookkeeping principles presenting superior transparency and unearthing requirements. The prevailing financial system of U.S, however, is reluctant to move from its developed accounting system to IFRS. At present, there are substantial differences and differences involving U.S., GAAP and IFRS in segments involving LIFO/FIFO record assessment, administration of unusual items, upward revaluation of enduring assets, cash flow statements and others (Shin, 2009).

Discussion

This section of the paper will try to address the major differences among the two accounting standards. In this section the differences that prevails in both the accounting standards will be explained using the following segments;

Financial Statement Presentation

Balance Sheet

Income statement/ Profit and loss accounts

SORIE or Statement Of Change In Equity

Cash flow Statement

Outline of the Financial Statement Presentation

In the relevant standards set for IFRS, the form and the content is itemized by IFRS, which includes IFRIC/SIC classifications, and IAS still extant. The additional requirements are to be or may be stated by regulators, stock exchanges, and the local statue. On the basis of relevant standards for GAAP, the form and the content is detailed by GAAP as set forth by SEC Regulation S-X and the GAAP hierarchy (AU Section 411).

In International Financial Reporting Standards, the financial statement comprises of the complete changes in equity, adjustments in the income statement, and any modifications in equity apart from those, which arise from capital dealings or investments with proprietors and distributions to these proprietors is known as a ...