Ifrs vs Gaap

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Craig Stroderd

Over a decade ago, it was believed that the whole world would likely adopt the Generally Accepted Accounting Principles (GAAP). At the point in time, the International Financial reporting Standards (IFRS) was only about ten years old. In the last decade, the IFRS has been adopted in many growing countries. Currently, it is anticipated that the U.S. will converge its GAAP with the international IFRS, leaving behind only a modified IFRS. This may occur as early as 2014.

The GAAP/IFRS convergence will require U.S. corporations to rework their financial statement presentation. If GAAP principles were to be listed in a book, it would be nine inches thick. IFRS fits into a book only two inches thick. GAAP is much larger because it is rule based, where IFRS is principle based. U.S. accountants will have more responsibility to make decisions based on their own judgment, due to less guidance. Most people believe that having the entire world using the same financial statement presentation will be overall beneficial. Being able to easily compare international financial statements to U.S. financial statements will not only be convenient, it should also increase commerce. Also, U.S. investors will be able to make better investment decisions about foreign companies. The convergence requires a lot of changes be made. Many aspects of the GAAP and IFRS are very different. It is the intent of this paper to analyze differences between the two methods in revenue recognition, earnings per share, inventory, and intangible assets.

When determining earnings per share, GAAP and IFRS have a few significant differences, as well as some similarities. Take for example, a contract that may either be settled by cash, or the issuance of shares. Under both methods, it is typically expected that shares will be accepted. The only difference being that IFRS will always expect shares to be taken, while GAAP may expect cash...
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