Difference Between GAAP and IFRS

Without accounting rules, businesses may readily manipulate their financial records to appear more profitable. It would also be more difficult to compare how different companies perform. This is where generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) come into play.

Most corporations adhere to these two sets of guidelines, one American and one international when generating financial statements. With these accounting standards in place, customers can be certain that firms are honestly reporting their finances and, as a result, make informed decisions about where to invest their money.

GAAP

Generally Accepted Accounting Principles (GAAP, U.S. GAAP, or GAAP (USA), pronounced like "gap") is the accounting system authorized by the United States Securities as well as Exchange Commission (SEC) and is the default accounting standard used by US-based corporations. GAAP refers to a common set of accounting standards and procedures that a company must follow at the time of preparation of financial statements. The Financial Accounting Standards Board (FASB) publishes and maintains the Accounting Standards Codification (ASC), the sole source of authorized nongovernmental U.S. GAAP. Beginning in 2008, the FASB published US GAAP in XBRL.

Sources for GAAP

The FASB Accounting Standards Codification is the main source of authoritative GAAP determinated by the FASB for use by nongovernmental businesses. The SEC's rules and interpretive releases issued under federal securities laws serve as official GAAP for SEC registrants as well. In addition to the SEC's rules and interpretive releases, the SEC staff issues Staff Accounting Bulletins that represent the staff's practices in administering SEC disclosure requirements, and it uses SEC Staff Announcements and Observer comments made at Emerging Issues Task Force meetings to publicly announce its views on certain accounting issues for SEC registrants. Examples of nonauthoritative accounting guidance and literature include the following: Practices that are well-recognized and popular in the sector includes FASB Concept Statements. The American Institute of Certified Public Accountants (AICPA) issues papers. International Financial Reporting Standards along with International Accounting Standards Board decisions regarding professional groups or regulatory authorities. Technical Information Service. AICPA Technical Practice Aids contains questions and answers for accounting textbooks, handbooks, and articles.

Why is GAAP Important?

GAAP is significant since it helps to preserve trust in the financial markets. Without GAAP, investors may be more hesitant to trust the information provided by public corporations. Without trust, we may see fewer transactions, perhaps resulting in greater transaction costs and a weaker economy. GAAP also assists investors in analyzing companies by facilitating "apples to apples" comparisons between one company and another.

What are NON-GAAP Measurements?

Companies may still present certain data that do not comply with GAAP requirements as long as they properly designate those figures as non-GAAP. Companies use this when they believe the GAAP guidelines are insufficiently flexible to capture specific details about their operations. In such cases, they may provide specially developed non-GAAP metrics in addition to the disclosures required by GAAP. Non-GAAP measurements, on the other hand, should be viewed with caution by investors since they can be used in misleading ways.

Who Uses GAAP?

Accountants and other financial professionals utilize GAAP rules and standards to organize and present financial reporting needed by publicly traded corporations in the United States.

Because GAAP is designed to ensure thorough, accurate, and consistent financial reporting across firms, it influences investment decisions by allowing investors to compare corporate performance objectively. It influences the stability of the investment market. There is no common GAAP standard, and the specifics vary by geography and sector. The Securities and Exchange Commission (SEC) requires that financial reporting follow GAAP guidelines. The Financial Accounting Standards Board establishes GAAP generally, whereas the Governmental Accounting Standards Board establishes GAAP for state and local governments. Publicly traded corporations must meet both SEC and GAAP criteria.

IFRS

The International Financial Reporting Standards are accounting standards established by the IFRS Foundation and the International Accounting Standards Board (IASB). They provide a standardized method of reporting a company's financial performance and condition, ensuring that financial statements are understandable as well as comparable across international borders. They are especially essential for companies whose shares or securities are publicly traded. IFRS has superseded many other national accounting standards around the world, but not the separate accounting standards in the United States, where US GAAP is used.

History

The International Accounting Standards Committee (IASC) was formed in June 1973 by accounting bodies from ten countries. It developed and published international accounting standards (IAS), interpretations, and a conceptual framework. Many national accounting standard-setters looked to these as they developed national standards. The International Accounting Standards Board (IASB) succeeded the IASC in 2001 with the goal of bringing national accounting standards into line through the establishment of global accounting standards. During its first meeting, the new Board approved existing IAS and Standing Interpretations Committee standards. The IASB has continued to produce standards, naming them "International Financial Reporting Standards" (IFRS).

In 2002, the European Union (E.U.) agreed that International Financial Reporting Standards (IFRS) would apply to the consolidated accounts of EU-listed corporations beginning January 1, 2005, bringing IFRS to many significant entities. Since then, several countries have followed the E.U.'s lead. The IFRS Foundation announced the formation of the new International Sustainability Standards Board (ISSB) in 2021 at the United Nations Framework Convention on Climate Change's COP26 in Glasgow.

Adoption

IFRS Standards are permitted in 132 jurisdictions worldwide, including Australia, Brazil, Canada, Chile, the European Union, GCC countries, Hong Kong, India, Israel, Malaysia, Pakistan, the Philippines, Russia, Singapore, South Africa, South Korea, Taiwan, and Turkey. To track progress toward the aim of a unified set of global accounting standards, the IFRS Foundation created and published profiles on the adoption of IFRS Standards in individual jurisdictions. These are based on data from multiple sources. The IFRS Foundation conducted a poll and received replies from standard-setting and other relevant authorities. As of August 2019, profiles for 166 jurisdictions were completed, with 166 of them mandating the application of IFRS Standards. Due to the difficulties of keeping up-to-date information in specific jurisdictions, three sources of information on current global IFRS adoption are recommended:

• IFRS Foundation Profiles Page
• International Federation of Accountants
• The World Bank

Difference Between GAAP and IFRS

Conclusion

To summarise, GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards) are two key frameworks that guide financial reporting processes for firms worldwide. GAAP is particular to the United States, but IFRS is used by over 144 nations worldwide. They differ in several ways, including inventory value methods, treatment of extraordinary goods, and asset valuation models. GAAP is critical for preserving trust in financial markets and permitting objective comparisons of organizations, particularly in the United States. IFRS, on the other hand, emphasizes standardized reporting across international borders, ensuring transparency and comparability for publicly traded organizations. Understanding these distinctions is critical for investors, regulators, and stakeholders to analyze financial data and make sound decisions correctly.