In the world of accounting, there are sets of rules that are followed to ensure that businesses run smoothly and in an orderly manner. In the United States, accounts follow a set of rules known as GAAP (Generally Accepted Accounting Principles). It is known as a rule-based system. However, a larger population of the world follows the accounting standard known as IFRS (International Financial Reporting Standards). Many countries follow this standard which is known to be more principled. These countries use this method so that they can understand each other’s methods and can identify While GAAP and IFRS are not very different from each other, they do have some important differences.
Since IFRS is based on principles, it leaves a lot of room for different interpretations that could lead to financial statement disclosures that can greatly influence a company. GAAP’s rule-based principle keeps companies on track by having a clear list of rules that show them what they can and cannot report. This doesn’t allow companies to do as they please and keeps everyone on the same page. Another difference between the two companies is the use of LIFO (Last in First out). This is an inventory method which means that the last inventory brought into the business will be the first to be sold. GAAP allows companies to choose between this or FIFO (first in, first out). However, IFRS does not allow companies to use LIFO and must opt for FIFO. When it comes to development costs, the standards differ again. GAAP always labels these costs as expenses. While IFRS have a criterion that if these costs match, they can be capitalized instead of spent. GAAP is a rule-based standard, if not it gives companies so many options. Once an asset is recorded at its market value, there is no going back on that amount, even if it changes in the future. However, IFRS says that if there is a change in the market value of the asset, they can reverse the amortization and change it to its new market value.
Although there are many differences between the two, why isn’t there a standard rule that is used throughout the world? One reason is based on the two standards that both have. The United States believes that they should have a specific set of rules and if it is broken, then they know to go to the auditors and accountants to find the problem. IFRS allow more freedom and prefer that they give companies more flexibility in how they approach their business. Another reason the two won’t merge is that IFRS likes to work only on the issues. They do not reach out to others or work with them to fix what is wrong. GAAP is the opposite, as they want others to jump in and help if there is a problem they can’t solve. They have published standards and none of them coincides with what the IFRS believe. This goes on to show that they are different.
Finally, one of the main reasons the two won’t come together to become one is politics. Politics is a big problem in many areas and accounting does not avoid it. In the United States, giving up their GAAP rule set to a third-party foreign policy they didn’t form doesn’t appeal to them. They believe that by giving up, they are not protecting investors in the country and leaving them responsible for future problems. GAAP members also think that with a more principle-based rather than rule-based standard, there is plenty of room for companies to do what they want. It’s awkward for GAAP to have looser rules and let companies do as they please. They believe that there is a lot of room for problems that can arise from this. Once asked why they don’t converge, they responded that investors believe that “sacrificing their high quality standards should not be compromised for the sake of uniformity ( https://www.ifac.org/global-knowledge- gateway/business-reports/discussion/if-ifrs-has-a-future-us).” However, they have made minor adjustments to GAAP to close the gap a bit between the two and they want to narrow the gap as much as possible without losing what they think is right.
In conclusion, there are many differences between GAAP and IFRS. Both are set up to help companies properly archive information and conduct business efficiently by following standards. The differences between the two standards have narrowed, but there is still a bigger gap between the two. It will be interesting to keep track of these two accounting standards and see if there will ever be a single set of standards.
