Question

In at least 150 words, discuss at least two differences between International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) accounting and discuss the effect, if any, that using IFRS instead of GAAP might have made in the outcomes of income statements, balance sheets, statement of cash flows, and financial ratios.

Answer 1

Following are some of key differences between IFRS and GAAP and impact in financial statements:-

Intangibles

Acquired intangible assets under GAAP are recognized at fair value, while under IFRS, it is only recognized if the asset will have a future economic benefit and has a measured reliability. Intangible assets are things like goodwill, R&D, and advertising costs.

Inventory Costs

Under IFRS, the last-in, first-out (LIFO) method for accounting for inventory costs is not allowed. Under GAAP, either LIFO or first-in, first-out (FIFO) inventory estimates can be used. The move to a single method of inventory costing could lead to enhanced comparability between countries, and remove the need for analysts to adjust LIFO inventories in their comparison analysis.

Write-Downs

Under IFRS, a write-down of inventory can be reversed in future periods if specific criteria are met. Under GAAP, once inventory has been written down, any reversal is prohibited.

Income Statements

Under IFRS, extraordinary or unusual items are included in the income statement and not segregated. Meanwhile, under GAAP, they are separated and shown below the net income portion of the income statement.

Classification of Liabilities

The classification of debts under GAAP is split between current liabilities, where a company expects to settle a debt within 12 months, and noncurrent liabilities, which are debts that will not be repaid within 12 months. With IFRS, there is no differentiation made between the classification of liabilities, as all debts are considered noncurrent on the balance sheet.

Fixed Assets

When it comes to fixed assets, such as property, furniture and equipment, companies using GAAP accounting must value these assets using the cost model. The cost model takes into account the historical value of an asset minus any accumulated depreciation. IFRS allows a different model for fixed assets called the revaluation model, which is based on the fair value at the current date minus any accumulated depreciation and impairment losses.

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