why is it important to consider the differences in IFRS and GAAP in general

Expert Solution

International Financial Reporting Standards (IFRS) is the accounting method that’s used in many countries across the world. It has some key differences from the Generally Accepted Accounting Principles (GAAP) implemented in the United States.

It is important to consider the difference because of following reasons

1. Locally vs. Globally

As mentioned, the IFRS is a globally accepted standard for accounting, and is used in more than 110 countries. On the other hand, GAAP is exclusively used within the United States and has a different set of rules for accounting than most of the world. This can make it more complicated when doing business internationally. Therefore It is important to consider the difference

2. Rules vs. Principles

A major difference between IFRS and GAAP accounting is the methodology used to assess the accounting process. It is important to consider the difference because GAAP focuses on research and is rule-based, whereas IFRS looks at the overall patterns and is based on principle.

With GAAP accounting, there’s little room for exceptions or interpretation, as all transactions must abide by a specific set of rules. With a principle-based accounting method, such as the IFRS, there’s potential for different interpretations of the same tax-related situations.

3. Inventory Methods

Under GAAP, a company is allowed to use the Last In, First Out (LIFO) method for inventory estimates. However, under IFRS, the LIFO method for inventory is not allowed. The Last In, First Out valuation for inventory does not reflect an accurate flow of inventory in most cases, and thus results in reports of unusually low income levels. . Therefore It is important to consider the difference

4. Inventory Reversal

In addition to having different methods for tracking inventory, IFRS and GAAP accounting also differ when it comes to inventory write-down reversals. GAAP specifies that if the market value of the asset increases, the amount of the write-down cannot be reversed. Under IFRS, however, in this same situation, the amount of the write-down can be reversed. In other words, GAAP is overly cautious of inventory reversal and does not reflect any positive changes in the marketplace.

5. Development Costs

A company’s development costs can be capitalized under IFRS, as long as certain criteria are met. This allows a business to leverage depreciation on fixed assets. With GAAP, development costs must be expensed the year they occur and are not allowed to be capitalized. Therefore It is important to consider the difference

ekkarill92 answered 1 year ago

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