Question

Briefly summarize the GAAP and IFRS systems

Answer 1

We live in an increasingly global economy, so it's important to be aware of the variations between the two prevailing accounting approaches used around the world by company owners and accounting professionals. International Financial Reporting Standards ( IFRS) – as the name suggests – is an international standard established by IASB. U.S. Accepted Accounting Principles (GAAP) are commonly not found in the United States. The Financial Accounting Standards Board ( FASB) determines the GAAP.

IFRS is used in more than 110 countries worldwide including the EU and many countries in Asia and South America. In contrast, GAAP is used only in the United States. Companies operating in the U.S. and overseas can face more difficulty in their accounting.

GAAP tends to be more rule-based while IFRS tends to be more grounded in principles. Under the GAAP, businesses will have to obey industry-specific rules and guidelines, while IFRS has standards that require discretion and analysis to decide how to apply them in a particular situation.

Both the GAAP and IFRS permit First In, First Out (FIFO), weighted average cost, and unique inventory valuation methods. GAAP also allows the Last In, First Out (LIFO) process, which is not allowed under IFRS however. Using the LIFO method can result in artificially low net profits, and may not represent a company's actual flow of inventory goods. Both methods allow to write down inventories to market value. However, if the market value increases later, only IFRS will allow reversal of the earlier write-down. Reversal of earlier write-downs is forbidden under GAAP. Under IFRS, inventory valuation could be more volatile.