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In: Accounting

Globally, accounting standards are developed based on different methods. It is generally agreed that the nature...

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)

Solutions

Expert Solution

The two system of regulation for accounting standards are Rule based (GAAP) and Principle based (IFRS) system.

Principle based system: It is the most popular system used all around the world. It is considered better as it is suitable to adjust principles of accounting as per transaction of the company compared to adjusting operations of company as per the rules of accounting. IFRS system is based on principles and state that the financial statements of the company should be comparable, understandable, relevant and readable. Its objective is to provides information related to financial position, profitability, position, liquidity and so on about the company to help users take rational decisions.

Rule based system: It is the standardized procedure for the reporting of financial statements. GAAP system is based on rules and permit investors easy way for comparing the financial statement of one business firm with some other firms. It mainly used when the business firm releases its prepared financial statement to the users or public. It helps in ensuring consistency and transparency of financial statements. GAAP is updated on regular intervals and issued by FASB.

Difference between the GAAP (Rule based) and IFRS (Principle based):

a) GAAP are developed by FASB while IFRS was developed by IASB.

b) GAAP is based on rules while IFRS is based on principles.

c) IFRS doesn’t permit use of LIFO for inventory valuation but GAAP allowed both LIFO and FIFO method.

d) Development cost is expensed in GAAP while IFRS allows capitalization of development cost if some criteria is met.

System describe IFRS is Principle based system

It is because IFRS doesn’t provide any regulations or any numerical standards rather IFRS describes broad rules for accounting. Due to such description, IFRS are called as principle-based accounting standards.

ekkarill92 answered 1 year ago
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