Question

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for inventories.

Answer 1

GAAP stands for Generally accepted Accounting Principles.

GAAP, are the common set of accounting standards in the U.S. GAAP, issued by the American Institute of Certified Public Accountants (AICPA),it includes the following items:

• Financial Accounting Standards Board (FASB) Standards,
• Interpretations, and Staff Positions;
• Accounting Principles Board (APB) Opinions; and AICPA Research Bulletins.

Today, the Securities and Exchange Commission (SEC) oversees all U.S. accounting practices, making sure the accounting practices adhere to GAAP standards. GAAP establishes standards to make financial records relevant and reliable for all interested investors, stockholders, or other readers of financial information.

The International Accounting Standards Board (IASB) in London developed the International Financial Reporting Standards (IFRS or GAAP). Today, the European Union requires all companies in Europe to follow accounting practices under the IFRS method. Over 100 countries currently use IFRS. When the U.S. completely adopts IFRS, it will be easier to compare U.S. companies to foreign companies, and would therefore allow U.S. companies to raise capital in foreign markets.

SIMILARITIES BETWEEN GAAP AND IFRS.

GAAP and IFRS are alike in many ways, thus making the convergence a realizable task. The conceptual frameworks of both methods are very similar in structure, referring to their accounting objectives, elements, and qualitative characteristics. A major similarity between GAAP and IFRS is that both standards use an income statement, a balance sheet, and a statement of cash flows. When dealing with cash and cash equivalents, both methods are essentially the same. Another major similarity is that both GAAP and IFRS prepare financial statements on an accrued basis; meaning revenue is recognized when it is realized or realizable. There are many other similarities between GAAP and IFRS, and will therefore help in a complete convergence in the near future, but before there is one international financial accounting set of standards, the differences between GAAP and IFRS have to be taken into consideration.

One major difference between accounting practices in GAAP and IFRS is that GAAP is rule-based while IFRS is principle-based. Principle-based accounting allows for different interpretation of the same transactions, where rule-based GAAP follows a set of rules in preparing financial statements – this means there is no room for error. In other words, GAAP standards are extremely strict in accounting practices and disclosure requirements, whereas IFRS practices are less restrictive; for example, the GAAP method is stricter when preparing income statements, where it requires use of a single-step or multiple step approach – IFRS does not mention either approach. In addition to the multiple-step income statement in GAAP, unusual and infrequent items must be included as extraordinary items – extraordinary items are prohibited in IFRS. There is also a major difference between the two methods in relation to the LIFO (last in first out) cost flow assumption. Only GAAP accepts the LIFO method for inventory valuation, whereas IFRS can only use average cost and FIFO (first in first out) for inventory valuation. The differences between the two methods need to be resolved to benefit economic globalization.