Saturday, 27 July 2013

several differences between the two and a few differences at framework level

What is GAAP (Generally Accepted Accounting Priciples)? Best answer known to this is that it is the accounting standard used by the US. Infact the only reason GAAP still exists today is because of the US. Most countries in the world have already moved on. And with the US its only a matter of time. And when you talk about GAAP it is inevitable to talk about IFRS (International Financial Reporting Standards). IFRS is something that is used by over 120 countries the most widely accepted accounting standard and pretty much for the right reasons. It is a 'Priciples based' accounting system compared to GAAP which is a 'Rule Based' accounting system.

There are several differences between the two and a few differences at framework level are explained below.

1) Performance: Gaap actually takes performance elements like gains, losses and comprehensive income into consideration unlike IFRS.

2) Documents: GAAP requires income of comprehensive statement along with the usual Balance sheets, cash flow, changes in equity, income etc.

3) Inventory Estimates: GAAP allows LIFO as well where as IFRS only allows FIFO method.

4) Write Downs: With IFRS write down can be reversed in future periods where as with US GAAP it is completely prohibited.

5) Deferred Taxes: They are shown seperately in IFRS where as in the US Gaap they are included with assets and liabilities.

6) Unusual items: Any extraordinary items are prohibited in the IFRS where as US Gaap allows them even if they are unusual and infrequent.

Basically a company with great results in GAAP will not look bad in IFRS unless the results are due to an extraordrinary item. But again since it would be disclosed
some one making the comparison can understand easily.

So to conclude though there are quite a few differences in both the standards a person looking at the statements would not feel tremendous statements. Now the question is when will the US give a go to IFRS Convergence.


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