GAAP vs. IFRS

Difference Between GAAP and IFRS

GAAP and IFRS are two accounting rules that standardize the standard of financial reporting. There are different procedures for calculating financial results of companies all over the world which are known local GAAP. GAAP is universally accepted values of accounting followed globally. Since different countries have different versions of GAAP the International Accounting Standards Board (IASB) has introduced a universal system of accounting that known as International Finance Regulation Standards or IFRS.

GAAP

GAAP is the set of rules which accountants in any country maintain to record transactions, and include them in financial statements. These are the sum of accounting standards used in any country that shows the rules regarding the preparation of financial statements of any organization. GAAP is followed to prepare the records of incomes, expenses, taxes and liabilities of individuals and companies and record them systematically.

Financial reports of different companies can be compared and analyzed without the fear of any doubt due to GAAP and this helps the financial experts and tax officials ,Banks, the share holders and potential investors who need to compare the results and decide upon better performing companies.

IFRS

Due to the presence of a lot of multinational companies nowadays, it is confusing for the parent company to assess the performance data of one of its branches operating in another country as they are following Local GAAP. This difference in accounting principles leads to many mistakes especially regarding taxation. Since different countries have different versions of GAAP the International Accounting Standards Board (IASB) has introduced a universal system of accounting that known as International Finance Regulation Standards or IFRS.  IFRS is encouraged by IASB and it is meant to ensure that all countries accept the IFRS.

Though there are many similarities between the two terms, there are striking dissimilarities as well

As far as inventory measurement is concerned, GAAP says that its value should be found out on the basis of FIFO, LIFO and weighted average method unlike the IFRS which does not use LIFO to find out the value of inventory.

In situations where services are provided, GAAP takes money as revenue and does not take any pending service into account unlike the IFRS in which case part services are also converted into revenue. If this is impossible, IFRS takes the profit to be zero.

In construction business, GAAP recognizes a contract even if it is incomplete and according to it the contract can be shown in the financial results. But in case of IFRS, in spite of the fact that it recognizes the % of completion method, the gross profit approach of % completion is prohibited.

 

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