IFRS (International Financial Reporting Standards) and GAAP (Generally Accepted Accounting Principles)
Last Updated : 21 Apr, 2025
What is IFRS?
International Financial Reporting Standards are a set of accounting standards developed by the International Accounting Standards Board. The main AIM of IFRS is to provide guidance on the preparation and presentation of statements related to finance. IFRS is used in over 140 countries, including the European Union, Australia, Canada, and Japan, and its popularity in other countries is also increasing. The main goal of IFRS is to improve transparency, and consistency in financial reporting around the world making it simpler and easier for the investor to compare financial statements from different countries.
What is the need for IFRS?
The need for IFRS arises from the fact that businesses and investors operate in an increasingly globalised economy. With the expansion of international trade and investment, there is a growing need for a common global language for financial reporting. IFRS provides this common language by establishing a single set of accounting standards that can be used by companies in different countries.
Some of the key reasons why IFRS is needed are:
1. Reduces costs: When businesses use just one accounting standard, they can keep from spending extra cash on making different financial papers for different countries. This is super helpful for worldwide companies that follow diverse accounting rules in different parts of the world.
2. Consistency and comparability: Basically, IFRS ensures that all businesses follow the same rules when putting together their financial reports. This way, it's simpler to see how each one is faring and to see any trends that pop up over time.
3. Better transparency: IFRS makes financial statements clearer by forcing businesses to be more transparent and give thorough and similar information in their money statements. This makes it simpler for financiers and experts to compare the financial statements of various companies and nations, which could lead to smarter investment choices.
4. More money: When companies are upfront about their finances using IFRS, they could get more money from investors worldwide. This is really helpful for businesses in places where it's hard to find investment.
What is GAAP (Generally Accepted Accounting Principles)?
GAAP (Generally Accepted Accounting Principles) are the rules and guidelines that companies follow to make their financial statements. GAAP makes sure that all companies report their financial info in the same way so that it's easier to compare them.
GAAP is put together and looked after by the Financial Accounting Standards Board (FASB), a separate group located in the US. The FASB is in charge of determining how companies should manage their finances, whether public, private, or not-for-profit.
Some of the key features of GAAP are:
- Principles-based: GAAP works principle-based, which means it concentrates on the fundamental logic of accounting instead of particular regulations. This offers more leeway and allows for individual decisions while using the criteria in varied circumstances.
- Rule-based: While GAAP is generally principles-based, there are some areas where it is rule-based. For example, there are specific rules for how companies should recognize revenue and account for inventory.
- US specific: In the US, they have their own set of accounting rules called GAAP. Other countries have their own rules too, but some have switched over to IFRS. Still, plenty of countries stick to their own way of doing things.
- Historical cost: GAAP goes with the historical way of cost principle, where assets and liabilities are recorded at the original cost and not their current market value. This could lead to certain assets being valued lower than what they are worth today.
Ten principles that are generally included in GAAP
1. Principle of Sincerity
This principle states that the accounting staff responsible to provide information about all the business transactions should provide that information accurately.
2. Principle of Prudence
This principle states that all accounting information should be based on proper and documented facts and not on guesswork.
3. Principle of Permanence of Records
This principle emphasises on having a permanent and consistent way of maintaining financial reports so that they can be compared from report to report.
4. Principle of Continuity
This principle states that all transactions should be done and recorded with the assumption that the business will continue to operate.
5. Principle of Regularity
This principle states that there should be regularity in following a specific accounting standard.
6. Principle of Non-compensation
This principle states that the accountant should record all the transactions whether they are positive or negative. Accountants should record all the transactions as they are. They do not get paid on how good or bad reporting turns out.
7. Principle of Periodicity
This principle states that all financial data should be well organised and recorded according to the accounting period the data falls into.
8. Principle of Consistency
This principle requires that accounting methods as well as principles should remain consistent from one period to the next in order to enable accurate comparisons over the time period.
9. Principle of Materiality
This principle states that accounting treatments and disclosures should be determined based on their potential impact on financial decision-making, with material items being disclosed and immaterial items being omitted.
10. Principle of Utmost Good Faith
This principle requires that when there is uncertainty or ambiguity in accounting treatments, companies should choose the option that is most conservative, resulting in a lower reported income or asset value.
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Part B