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IFRS and GAAP Differences and The Impacts

This memo discusses the differences between GAAP and IFRS accounting standards. GAAP is governed by rules set by FASB, while IFRS is based on principles issued by IASB. Some key differences include inventory valuation methods and treatment of development costs. While the US uses GAAP, understanding IFRS is important for global competitiveness. IASB is responsible for developing and maintaining IFRS through its due process. The memo recommends a company opening a US office use GAAP but also implement a modified form of IFRS reporting to gain its benefits.

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Benita Clarissa
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113 views

IFRS and GAAP Differences and The Impacts

This memo discusses the differences between GAAP and IFRS accounting standards. GAAP is governed by rules set by FASB, while IFRS is based on principles issued by IASB. Some key differences include inventory valuation methods and treatment of development costs. While the US uses GAAP, understanding IFRS is important for global competitiveness. IASB is responsible for developing and maintaining IFRS through its due process. The memo recommends a company opening a US office use GAAP but also implement a modified form of IFRS reporting to gain its benefits.

Uploaded by

Benita Clarissa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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TO: Alexander Owen, Hello World Startups Accounting Manager

FROM: Benita Clarissa, El-Twansey Accounting Services Accountant

DATE: November 7, 2021

SUBJECT: GAAP and IFRS

It is critical to have uniform financial statements. The two most widely accepted sets of standards
are IFRS reporting and US GAAP. Here is some information to clarify the differences between
IFRS and GAAP. Moreover, this memo also explains the needs of the accounting standard
implementation in the financial statements and the role of IASB in establishing the standard.

IFRS and GAAP Differences and the Impacts

Generally Accepted Accounting Principle (GAAP) is a set of accounting guidelines and


procedures to prepare company financial statements that are defined by the Financial Accounting
Standard Board (FASB). It is governed by a set of rules. International Financial Reporting
Standard (IFRS) is the universal business language for companies to report financial statements.
IFRS is based on principles and issued by International Accounting Standard Board (IASB). For
inventory valuation, both GAAP and IFRS could apply FIFO and Weighted Average Method.
However, LIFO is acceptable in GAAP but not in IFRS. Furthermore, in GAAP, development
costs are recognized as an expense, while in IFRS, development costs are capitalized only if
specific conditions are met. Inventory reversal is prohibited in GAAP. However, it is acceptable
in IFRS with certain conditions (Surbhi, 2017).

To remain competitive in global markets, it is necessary to be financially bilingual and


understand how the differences in IFRS and GAAP affect markets, investors, and stakeholders.
While the US currently has no intentions to require firms to implement IFRS, acceptance, and
implementation of IFRS are required to operate in the international market. The standards will
improve the company's transparency of financial information, increase accountability, and
minimize reporting costs. Wall Street Prep (n.d.) explained there are some differences in
financial statement presentation between IFRS and GAAP:
 Income statement: US GAAP requires presenting 3 periods whereas IFRS only
requires 2. However, many companies that following the IFRS reports for 3 periods.
 Balance sheet: US GAAP classifies assets in decreasing order according to their
liquidity (current assets before non-current assets). On the other hand, in IFRS, assets
are listed in increasing order of liquidity (non-current assets before current assets).
 Cash flow statement: US GAAP requires that interest expense, interest income, and
dividend income be recorded in the operating activities section, and dividends paid to
be stated in the financing section. However, IFRS gives more flexibility in defining
which section of the Cash Flows Statement that these items should be included.

Moreover, the revenue recognition method was a joint project between the FASB and IASB with
nearly perfect convergence. The improved standard made it possible for accounting guidelines to
better reflect the economics of new business models and products. As a result, the
standardization and comparability of revenue recognition across different enterprises and
industries are made easier (Wall Street Prep, n.d.).

IASB Role

INAA (2020) highlights that IASB handles all IFRS technical issues with the following
responsibilities:
 Developing and pursuing the IFRS's technical agenda, subject to consultation
requirements with selected trustees and the public.
 Preparing and issuing IFRSs and exposure drafts following due process.
 Approving and issuing interpretations issued by the IFRS Interpretations Committee.

Since October 2002, the IASB and FASB committed to collaborating to the convergence of US
and international accounting standards. IASB contributes to the improvement of GAAP in the
international accounting standards. The FASB’s operations are overseen by the IASB. FASB
also keeps track of IASB’s projects (INAA, 2020).

In conclusion, it is important to apply international accounting standards in financial statements.


Your company is opening a new office in the United States. It is necessary to use GAAP as the
primary financial reporting standard. However, it is strongly recommended to have the modified
form of IFRS financial reporting to get the benefits from it.

References

INAA. (2020, November 13). What’s the Relationship Between IASB and FASB? Retrieved from

INAA Group: https://www.inaa.org/whats-the-relationship-between-iasb-and-fasb/

Surbhi. (2017, May 19). Difference Between GAAP and IFRS. Retrieved from Key Differences:

https://keydifferences.com/difference-between-gaap-and-ifrs.html

Wall Street Prep. (n.d.). US GAAP vs IFRS. Retrieved from Wall Street Prep:

https://www.wallstreetprep.com/knowledge/us-gaap-vs-ifrs-differences-similarities-

examples-pdf-cheat-sheet/

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