Differences Between GAAP and IFRS Research Paper

Running Head: DIFFERENCES BETWEEN GAAP AND IFRS 1

Differences Between GAAP and IFRS Accounting Practices

Sharon Woodards
Liberty University

Intermediate Accounting II 302
Professor Ashley Harper
November 7, 2014

DIFFERENCES BETWEEN GAAP AND IFRS 2

Both the IFRS ( International Financial Reporting Standards ) and the GAAP ( Generally Accepted Accounting Principles ) are a set of accounting rules that companies either can or must follow when preparing their financial statements. Set by policy boards, the United States enforces the use of GAAP as the set of rules of processes and standards that its companies must use for reporting and recording of their financial statements. At the same, other parts of the words use the IFRS as their set of rules for companies to follow. This IFRS set of rules were developed by the International Accounting Standards Board (IASB). Due to this, the world has been talking about combining the two standards into one globalized set of accounting standards that will comprise of both standards. The object of this would be to have the world recognize one set of globalized set of accounting practices. There are some differences that the US should be aware of before the convergence between the two ever takes place. Some of the major differences between GAAP and IFRS revolve around grants to employees, vesting, modifications, tax withholding, inventory differences, revenues and expenses, required financial documents, assets and liabilities, gains and losses, and comprehensive income. One of the key differences between the two sets of standards is when it comes to the basics of each set. GAAP tends to be more rule based, while the IFRS is based on principles. This principle base allows the IFRS to have more leeway in its interpretations of various transactions. The negative part of this is the inconsistency that arises. GAAP rules were first introduced to meet the needs of both profit and non-profit companies, but the IFRS was dsigned to meet the needs of profit bearing companies. Therefore this allows companies within the United States, no matter the profit objectives, to report financial information using the same method. However, the DIFFERENCES BETWEEN GAAP AND IFRS 3

international companies that are non-profit run into problems using the IFRS because it does not meet their needs. Another one of the key differences between the two sets of standards is the way inventory is reported. The GAAP allows the LIFO and FIFO methods to be used and a consistent cost method is not a requirement. On the other hand the IFRS does not use the LIFO method. In fact it considers it completely unacceptable. Their standards include a consistent cost formula throughout inventories. Both recognize the cost of inventory as an expanse when the inventory is sold. Under IFRS standards inventory is written down to net realizable value when realizable value is less than cost. Net realizable value is the estimated selling price less the estimates cost of completion and sale. Under IFRS if this item has been written down and the value increases then the write down is reversed. The GAAP writes down inventory is written down to market value when market value is less than cost. The item cost is not reversed unless for recoveries in value unless it involves an change in exchange rates. The impact to the accounting field is companies that use LIFO will have to reevaluate their inventory, which may cause major tax liabilities due to the IRS’s LIFO rules. The reporting and recording of revenues is another area where the two standards differ. Under the IFRS revenues are recognized only if likely the future benefits derived will flow to the entity and can be measured. Revenue from the sale of goods is recognized when the entity has fully transferred all risks and ownership to...

References: Berkowitz, Art and Richard Rampell. “The Accounting Debate: Principles vs. rules.” The
Wall Street Journal.Dow Jones & Company, 2 Dec 2002. Web 21 Nov. 2014
Forgeas, Remi. “Is IFRS That Different From U.S. GAAP?” AICPAIFRS Resources. The
American Institute of Certified Public Accountants, 16 june 2008. Web, 10 Oct.2014
Fosbre, Anne B., Ellen M. Kraft, and Paul B.Fosbre. “ The Globalization of Accounting
Standards: IFRS Versus US GAAP.” Global journal of Business Research 3.1 (2009):
61-71. EconLit with Full Text. Web 1o OCT. 2014
Harris, P., & Naserelddin, M. (2014). SIMILARITIES AND DIFFERENCES BETWEEN THE IFRS AND U.S. GAAP
ON PROPERTY, PLANT, AND EQUIPMENT. Construction Accounting & Taxation, 24(4), 19-27
Nadel, A.A. (2010). Bridging the GAAP to IFRS. Journal of Retirement Planning, 13(2), 9-12, 36-37.
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