Question

International Financial Reporting Standards (IFRS) do not allow companies that follow the accounting rules to use LIFO for financial reporting. Your post should explain two things:

1. Why do you think LIFO is not allowed by IFRS but is allowed by GAAP in the United States?

2. Another area of accounting rules where there is a significant difference between US GAAP and International Financial Reporting Standards.

Please include the reference where you found information to form your opinion in 1 and where you found the difference in 2. We are not so worried about the exact format of the reference but you do need to point where you got your information. This original post should be made by Saturday.  

The follow up post will comment solely on the sources of information used by one of your colleagues in their original post. Your follow up post will answer two questions with regard to those sources:

1. Is this a trustworthy source?

2. Why or why not?

Answer 1

IFRS (INTERNATIONALFINANCIAL REPORTING STANDARDS) :-

Meaning:-

​​​ IFRS are a set of International accounting Standards which state how particular types of transactions and other events should be reported in financial statement.

IFRS was established in order to have common accounting language, so business and accounts can be understood from company to company and country to country.

IFRS is Principles-based.

IFRS are issued by International accounting Standards Board (IASB) they specify exactly how accountants must maintain and report their accounts.

GAAP (GENERAL ACCEPTED ACCOUNTING PRINCIPLES):-

Meaning:-

GAAP refers to a common set of accepted Accounting Principles, Standards, and Procedures that companies and their accountants must follow when they complete their financial statements.

REFERENCE

https://en.m.wikipedia.org/wiki/International_Financial_Reporting_Standards

https://www.ifrs.com/updates/aicpa/ifrs_faq.html#q1

Q.1.  Why do you think LIFO is not allowed by IFRS but is allowed by GAAP in the United States?

Ans LIFO Meaning : LAST IN FIRST OUT is an inventory valuation method based on the assumption that assets produced or acquired last are the first to be expensed.

LIFO method of inventory valuation, while permitted under the U.S. Generally Accepted Accounting Principles(GAAP), is prohibited under the IFRS. As IFRS rules are based on principles rather than exact guidelines, usage of LIFO is prohibited due to potential distortions it may have on a company profitability and Fianncial statements. In principle, LIFO may create a distortion of net income when prices are rising (inflation); LIFO inventory amount are based on outdated and obsolete numbers, and LIFO liquidations may provide unscrupulous managers with the means of artificially inflate earnings.

REFERENCE

https//www.investopedia.com/articles/investing/042115/why-last-first-out-banned-under-ifrs.asp

https://www.investopedia.com/ask/answers/011315/what-difference-between-gaap-and-ifrs.asp

Q.2. Another area of accounting rules where there is a significant difference between US GAAP and International Financial Reporting Standards.

Ans. GAAP vs. IFRS

1. Base

GAAP is Rules- based.

IFRS is Principles- based.

2. Liquidity

GAAP calls for accounts to be listed in the order of liquidity—or how quickly and easily they can be converted to cash. The items are arranged in descending order (most liquid to least liquid): current assets, non-current assets, current liabilities, non-current liabilities, and owners’ equity.

Under IFRS, the order is reversed (least liquid to most liquid): non-current assets, current assets, owners’ equity, non-current liabilities, and current liabilities.

3. Inventory valuation method

Under IFRS, the LIFO (Last in First out) method of calculating inventory is not allowed.

while under the GAAP, either the LIFO or FIFO (First in First out) method can be used for estimating inventory.

4. Intangible assets

Under IFRS, intangible assets are only recognized if they will have a future economic benefit. In such a way, the asset can be assessed and given a monetary value.

GAAP, on the other hand, recognizes intangible assets at their current fair market value and no additional (future) considerations are made.

REFERENCE

https://corporatefinanceinstitute.com/resources/knowledge/accounting/ifrs-vs-us-gaap/