In: Accounting
Globally, accounting standards are developed based on different
methods. It is generally agreed that the nature of accounting
standards depends on the systems of regulation. It has been argued
that there are two main systems of regulation.
Required: Identify and explain the difference between the two
systems of regulation, stating clearly which system you believe
describes the International Financial Reporting Standards
(IFRS)
Answer. There are two systems of regulation-
1. GAAP Rule based Accounting and
2. IFRS- Principle based Accounting
1. GAAP :
Generally Accepted Accounting Principles or GAAP refers to the standard framework, principles and procedures used by the companies for financial accounting. The principles are issued by Financial Accounting Standard Board (FASB). It is a set of accounting standards that consist of standard ways and rules for recording and reporting of the financial data i.e. balance sheet, income statement, cash flow statement, etc. The framework is adopted by publicly traded companies and a maximum number of private companies in the United States.
GAAP principles are updated at periodical intervals to meet with current financial requirements. It ensures the transparency and consistency of the financial statement. The information provided as per GAAP by the financial statement is helpful to the economic decision makers such as investors, creditors, shareholders, etc.
2. IFRS:
IFRS is short for International Financial Reporting Standard is a globally adopted method of financial reporting issued by International Accounting Standard Board (IASB). Formerly, it is known as International Accounting Standard (IAS). The standard is used for the preparation and presentation of the financial statement i.e. balance sheet, income statement, cash flow statement, changes in equity and footnotes, etc.
IFRS ensures comparability and understandability of international business. It is aimed to provide users with information about the financial position, performance, profitability and liquidity of the company, to help them in making rational economic decisions.
COMPARISON | GAAP | IFRS |
---|---|---|
Acronym | Generally Accepted Accounting Principles | International Financial Reporting Standard |
Meaning | A set of accounting guidelines and procedures, used by the companies to prepare their financial statements is known as GAAP. | IFRS is the universal business language followed by the companies while reporting financial statements. |
Developed by | Financial Accounting Standard Board (FASB). | International Accounting Standard Board (IASB). |
Based on | Rules | Principles |
Inventory valuation | FIFO, LIFO and Weighted Average Method. | FIFO and Weighted Average Method. |
Extraordinary items | Shown below. | Not segregated in the income statement. |
Development cost | Treated as an expense | Capitalized, only if certain conditions are satisfied. |
Reversal of Inventory | Prohibited | Permissible, if specified conditions are met. |