April 6th 2015
Accounting is an important feature in every business worldwide. Essentially, it is necessary in order to keep track of the economic events that occur within a business. These records are used within a company, however they are also used for other purposes, one of them being to report their financial activities. For this to be effective, there must be standards that businesses to adhere to in order to make financial reporting uniform across the board. That is where the International Financial Reporting Standards [IFRS] and the Generally Accepted Accounting Principles [GAAP] come into play. There are many similarities to be found throughout their guidelines but they are also different in several ways.
In what ways does the format of a statement of financial position under IFRS often differ from a balance sheet presented under GAAP?
Under both IFRS and GAAP, the reporting of financial position is required. Both systems have regulations that determine what the layout of the income statement and balance sheet look like, which financial periods have to be reported, and how debt must be presented. The layout of the income statement and balance sheet actually have no specific model under the GAAP system. Similarly, the IFRS system also does not have a model layout for those statements, although it is important to note that it does have a list of minimum line items. A minor difference is that while IFRS merely recommends the separation of current and non-current assets and liabilities, GAAP actually requires that separation. When it comes to determining which financial periods have to be reported, public companies are required to adhere to the policies of the Securities and Exchange Commission [SEC]. Generally, that will include providing the balance sheets for the previous two years. Under both systems, companies are mandated to present comparative financial reports. Using the IFRS system, comparing one accounting period to the accounting period prior to it is allowable. However, using the GAAP system, more often than not the comparison will be between fiscal years.
Do the IFRS and GAAP conceptual frameworks differ in terms of the objective of financial reporting? Explain.
It is evident that both GAAP and IFRS have several similarities and differences. The simplest distinction to make is that one is rule-based and the other is principle-based. Since GAAP is a moniker used to shorten Generally Accepted Accounting Principles, it would seem to be the obvious choice for the system that is principle-based. In actuality GAAP is the more rule-based system. IFRS is based in principle. The differences in the systems are the reason why some aspects of a company may be viewed differently.
Both systems require companies to report their operating expenses. Under IFRS, losses incurred for the sake of the company’s primary business are all considered to be operating expenses. IFRS however does not actually make a distinction between losses and operating expenses. GAAP, on the other hand, does make that distinction. Plant Property and Equipment are assets that enjoy long useful lives. On financial statements, they are reported at their original cost, minus depreciation costs if there are any. Depreciation is considered a loss, but there is also the possibility that long term assets can experience an increase in value. That would realistically be a gain. IFRS recognizes that positive changes in value can occur. Under GAAP, however, only depreciation is recognized. That being the case, it becomes obvious that the inability to report an increase in the values of fixed assets runs the risk of having a majorly negative effect on a company. Not including the average cost method, there are two standard inventory methods. Generally, companies will either utilize FIFO or LIFO; first-in-first-out and last-in-first-out respectively. However, the IFRS system restricts the use