Drawing the Line to Understand the Differences Between GAAP and IFRS
The GAAP and IFRS are the most prevailing set of rules that accountants follow worldwide. Having said that, the two are not necessarily the same. Several determinants, like scope, methodologies, and principles, draw out differences between GAAP and IFRS. Regardless, they both succeed in being the definitive rulebook for local international accounting entities.
We’re going to list down each factor for you to understand such variances. Upon learning the differences between GAAP and IFRS, you’ll be able to find out how to apply both of them without confusion. As a result, you open your mind to different accounting systems. Since different countries apply either principles, you’ll get the advantage of knowing them both. It works best when you’re conducting businesses outside your native country.
Nations’ Preference as Accounting Practice
GAAP originated from the United States, so it’s only natural that it applies such practice. This could also be true for sovereign jurisdictions under the US, like Puerto Rico and Guam. Meanwhile, IFRS is more wide-ranging, covering 110 countries overall. When you expand your business or create a new one on another nation, make sure to determine its accounting practices. This lessens complications when you do financial reporting.
One of the major differences between GAAP and IFRS is that they utilize distinct accounting approaches. For one, IFRS allows for specific interpretations since its core principles are more flexible. On the other hand, GAAP emphasizes more on direct rules, which are not subject for convenient customizations or modifications.
IFRS permits capitalization of a company’s development costs, as long as the owners meet certain requirements. As a result, you can leverage devaluation on your business’ fixed assets. As for GAAP, development costs are only possible during the year they befall. Unfortunately, you cannot monetize on these expenses.
Inventory Estimation Systems
GAAP typically uses the Last In, First Out (LIFO) method for approximating inventory. On the contrary, IFRS doesn’t allow such valuation. The reason for this is that LIFO provides less precise results which reflect to lower income levels.
There are also differences between GAAP and IFRS in terms of write-down reversals for inventory. In case the market value of the asset increases, you can reverse the amount of the write-down under GAAP rules. This is because GAAP closely watches such scenario and promotes neutrality as to reporting of inventories in the financial records. Meanwhile, this is not possible with IFRS principles.
Under IFRS, intangible assets like advertising costs have innate value, as these are treated as economic resources. The rules state that its future value will be recognized in the records. Meanwhile, GAAP acknowledges intangible assets only at its fair market value.
GAAP utilizes a cost model in the valuation of fixed assets like property and equipment. This model accounts the historical value of an asset less any accumulated depreciation. On the contrary, IFRS uses a revaluation model. The computation for this is achieved by identifying the fair value at the current date and lessening any accumulated depreciation and impairment losses.
Unusual Items on Income Statements
The IFRS includes extraordinary items in its income statement. This means there won’t be any segregation or separation required when recording these matters. On the other hand, the GAAP indicates an opposite approach, displaying items on a separate corner of the income statement.
GAAP has two categories for liabilities, namely current and noncurrent. A current liability is an obligation which company must settle within 12 months. Meanwhile, a noncurrent liability exceeds 12 months.
IFRS has no differentiation of liabilities whatsoever, as all debts are already deemed noncurrent on the balance sheet.
GAAP and IFRS share virtually the same characteristics in terms of financial reporting methods. Both enforce relevance, transparency, comparability, reliability, and understandability, for instance. The main difference is that IFRS has stricter regulations. For instance, an individual can’t make a decision readily due to certain circumstances.
Well, these are the main differences between GAAP and IFRS you need to know. If you’re planning to incorporate your company into a foreign land, you must take these concepts seriously. Should you need further assistance, we can lend you a hand. Contact us for a personal consultation and we’ll answer your queries in the best possible way.
Chai Chung Hoong, Account Manager
Chai Chung Hoong will assist you in all accounting related services, and help your company in digital transformation.Contact Us