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Comparing and Contrasting GAAP and IFRS

For whatever reason, the US sometimes does it its way, even if the rest of the world doesn’t. Accounting methods in the United States (GAAP) are different from those used by most of the rest of the world (IFRS). There are many important differences between GAAP and IFRS. Some of the major differences come in how the income statement is calculated, how reserves are calculated, and the financial reporting required. The first major difference is how the income statement is constructed and what it contains.

Most of the differences in income statements are variations in format. In GAAP, there are two main forms: single-step and multiple-step. In a single step, all expenses are classified and subtracted to find the pre-tax income. With several steps, the cost of goods sold (COGS) is reduced by sales to show the profit margin. Next, other expenses or gains are added up and subtracted from gross profit to find pre-tax income. In IFRS there is no fixed format. However, there are several things that need to be provided in the income statement. These items include income, financial expenses, profits or losses of associates and joint ventures using the operating method, the method used, the tax expense, the after-tax gain or loss on disposal of assets or termination of operations, and net profit or loss. One of the differences that should be mentioned is that special items are not allowed in the IFRS income statement. Although they are unusual and rare in GAAP income statements, they do appear there and must be noted. There are also differences in accounting methods between GAAP and IFRS.

In GAAP, accountants can value stocks in several ways. Last in last (LIFO), first in first (FIFO), and balanced average are acceptable methods of inventory accounting. However, when using IFRS, weighted average and FIFO are required, but LIFO, which is widely used in the United States, is not possible. The reason LIFO is often used in the US, and not allowed under IFRS, is because LIFO is used for better accounting, while FIFO provides better and more accurate financial information. Another difference in valuation between GAAP and IFRS is that while inventory can be valued in both, it can only be valued at cost in IFRS. For example, if the economy is down and the cost of a company’s assets decreases, the stock may be written down at a lower market value under GAAP and IFRS. The difference is that if the economy recovers, the stock can only be valued at current prices under IFRS. Another major difference between GAAP and IFRS is the financial statements required.

There are additional financials required by GAAP and that is the statement of comprehensive income. This comprehensive income statement can be included in the income statement. Complete Inc.’s financial statements allows you to clearly see the details of fixed assets. Although IFRS does not require a separate statement of comprehensive income, all of its items appear in other financial statements. In general, IFRS is less demanding and has fewer forms. They both get the job done and it’s hard to make a strong case that one is better than the other. So this raises a few questions: If both guidelines reach the same point, will the US switch to IFRS? Or should they change? An article from the journal Accounting Horizons entitled “Potential Adoption of IFRS by the United States: A Critical View”, by Devrimi Kaya and Julian A. Pillhofer, carefully examines these questions. Their conclusion, “The dangers of political pressure and the inability of the IASB to ensure proper implementation and enforcement of IFRS are seriously undermining the global convergence of accounting standards.” accounting. and Pillhofer 294). In general, from their research, they believe that the United States should move to IFRS because of the difficulty of knowing and switching between GAAP and IFRS. in this term they also refer to the IASB, which is the code for US GAAP. Another online article by David Albrecht concludes as follows: “In conclusion, no interest the United States to switch to IFRS. The term affects our economy because it can harm small capital for American investment projects. for international employees who are better versed in IFRS can also be harmful”. new. This will also cause people to go back to school to learn the new system and force universities to change what they teach. In general, this will cause a huge reaction in the accounting world.

Although people may have different views on whether or not the US should switch to IFRS and move away from GAAP, one thing remains the same; different and difficult to exchange. The main difference is the method of calculating income, the rules for calculating the inventory, and the financial reporting required. There are countless other differences between IFRS and GAAP, too numerous to mention here. Maybe one day the US will switch to IFRS but for now it looks like GAAP will stay.

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