Saturday, November 19, 2016

Differentiate between IFRS and GAAP? | MYACCOUNTINGINFO.NET

IFRS or GAAP - This is one among the most heated topics in the world of accounting. Along the passing years, IFRS has gained a lot of popularity and most of the countries are adopting it over the latter. But you needn’t worry about it. Making choices is hard but by the time you finish this article you will have a clear vision about both of these systems.

IFRS and GAAP
What is IFRS?


It is a universally adopted method of financial reporting. Earlier it was called as international accounting standard (IAS). This standard is utilized to prepare and present the financial statement i.e. income statement, changes in equity, footnotes, balance sheet. It certifies comparability and understandability of the international business. Its sole aim is to provide its users with information related to the financial position, liquidity, and profitability of the company, performance and to help them make rational economic decisions. Today, nearly 120 countries have adopted it. Adopting IFRS has made the presentation of financial statements easier than ever

What is GAAP?

GAAP refers to the standard framework, principles, and procedures used by the various companies for financial accounting. It consists of standardized methods and rules for reporting and recording the financial data i.e. income statement, balance sheet, cash flow statement, etc. This framework is adopted by a majority of the public trade companies and private companies in the United States. This framework provides transparency and consistency in the financial statements. The information provided by this framework is of great use and is helpful for making important economic decisions by the investors, creditors, shareholders, etc.

Major differences:
  • GAAP stands for generally accepted accounting principles whereas IFRS stands for international   financial reporting standard. 
  • GAAP is basically a set of accounting guidelines and procedures used in preparing statements by various companies. 
  • On the other hand, IFRS is a universal business language which is used by the companies while getting their financial statements recorded. 
  • The Financial Accounting Standard Board (FASB) and International Accounting Standard Board (IASB) issues GAAP and IFRS respectively.
  • Usage of last in first out (LIFO) is only allowed in IFRS.
  • in the case of development cost, the GAAP considers it as an expense but in IFRS the cost is capitalized provided the mentioned conditions are met.
  • Inventory reversal is allowed only in IFRS but only when certain conditions are met.
  • IFRS and GAAP are based on principles and rules respectively.
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Wednesday, November 16, 2016

What is the most important IFRS underlying accrual accounting?

There are two major ways by which recording of income and expenses takes place in accounting. These are cash basis and accrual basis.
IFRS underlying accrual accounting

Cash basis method:

In the cash basis method, the expenses are recorded as the cash is paid and the income or revenue is recorded when the cash is received. This is the simplest method of recording the transactions and no amount of revenue is reflected in the account until and unless the payment has been received. If just in case a business in debt, it will be shown in the books only when the debt is paid off. But this method is only allowed for small businesses.

Accrual basis method:

In accrual basis accounting, it’s completely different. In it the revenue is recorded on the day it is earned and the expenses on the day they are incurred. Both of these aren’t concerned with the actual date of the cash flow. Just in case, the business has only transactions via cash then both accrual basis and cash basis will present the same results. Even if some credit transaction is done in the business at any time of the year the results will vary automatically.

Importance:

In IFRS, it is mandatory to utilize the accrual basis method for keeping an account of all the revenue and expenses. Let’s take an example of the scenario where the business has accounted a sale in 2016 but is going to receive the payment for it only in 2017. In this case, the sales will still be recorded for 2016, irrespective of the date when they receive the payment. 

Under the IFRS system, except the cash flow system the underlying assumption for preparing the financial statements is on the basis of accrual basis method. This method is chosen, as it’s very flexible and provides a base for managing many opportunities to manipulate the financial statements.

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