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GAAP Vs IFRS: A Look at the Benefits of IFRS and the Differences Between GAAP and IFRS

April 11, 2012 | Comments: 0 | Views: 236

The globalization of business has called to the accounting field to join the movement. This movement is from GAAP which stands for the Generally Accepted Accounting Principles which creates the accounting guidelines for the United States to IFRS stands for the International Financial Reporting Standards. IFRS was adopted by the International Accounting Standards Board in 1989 to create the principle based standards and interpretations. With more than 110 countries adoption of IFRS and more set to transition to adapt to the standards the US decided to make the move. The United States set December 15, 2014 as the target date to fully converge to use IFRS for financial reporting. I am going to explain the benefits of switching to IFRS as well as some of the differences between IFRS and GAAP.

The US wants to move towards a global accounting standard because it can decrease the costs of preparing and interpreting financial statements. When accountants have to look through two different types of accounting standards it can become very complex and difficult so the idea of having one set of standards makes everything clearer. Having a global accounting standard also decreases capital cost which is always a benefit to a country.

The US market will see many benefits with this conversion to IFRS. It will see a more enhanced worldwide comparability for investors and more efficient capital allocation. It will enhance credibility of local markets to foreign investors which can help out economy out of the recession the market crash of 2008 left us in. There would be no need to develop and maintain national standards since we would be under international standards.

Companies would also benefit off the move in many different ways. They would lower cost of capital due to the new standards. IFRS would make consolidation and cross-border acquisitions much easier for companies. This would lead to an encouragement of integrated IT systems which would connect the world. These are all example of how companies are going to benefit from IFRS.

One of the first clear differences between the two is that GAAP is rule-based and IFRS is principle based. In a principle based accounting system such as IFRS when an area of interpretation comes up it can be explained by the standards setting board. This provides less exceptions compared to a rule based accounting system which causes a clearer explanation. This advantage of fewer exceptions makes IFRS a more ideal accounting system to use.

GAAP and IFRS are very different when it comes to revenue recognition. Under GAAP revenue is either realized or realizable and earned. This recognition of revenue involves an exchange transaction which means the revenue should not be recognized until an exchange transaction has occurred. IFRS on the other hand recognizes revenue through four different types of revenue transitions. These four transactions are sales of goods, rendering of services, others' use of an entity's assets, and construction contracts. There is a probability for each of these categories that they will have economic benefits associated with the transaction which will then flow to the entity and that the revenue and costs can be measure reliably. These principles applied to each of the categories do not have any further rules or acceptations which again causes for a clearer explanation.

When dealing with inventory there are also clear difference between the two standards. Under GAAP FIFO, LIFO, and average cost methods are all allowable. A consistent cost formula for all inventories similar in nature is not explicitly required. Under IFRS inventory standards the LIFO method is banned and the same cost formula must be applied to all inventories similar in nature or use to the entity. Although under GAAP all three cost methods are not prohibited due to IFRS prohibiting LIFO it gives the United States an equal inventory method as many other international countries. This similarity makes business conversion between countries much more appealing and easier.

The move to IFRS is clearly one that will make the US join the rest of the world. The world will have a single language of accounting which will make business a lot easier than it is today. The two standards system creates difficulty differentiating between concepts. Globalization has finally reached accounting and the benefits are endless.

By: Michael Kelley

Source: EzineArticles
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