Every country has adopted its own standards for financial reporting. In the United States, accountants follow the generally accepted accounting principles (GAAP) when they compile financial statements. Outside the U.S., many countries follow the International Financial Reporting Standards (IFRS), which aims to establish a common global language for company accounting.
Approximately more than 150 countries have made a public commitment to IFRS reporting standards. While the U.S. Securities and Exchange Commission has expressed desire to switch from GAAP to IFRS, however development has been sluggish.
Key Differences
The main difference between the two standard is: GAAP is rules-based and IFRS is principles-based. IFRS guidelines have lesser overall detail than GAAP. A notable difference between GAAP and IFRS is their treatment of inventory. IFRS rules has no option to use last-in, first-out (LIFO) inventory accounting methods. GAAP rules allow for LIFO apart from other options such as first-in, first-out method (FIFO) and the weighted average-cost method. GAAP does not allow for inventory reversals, while IFRS permits them under certain conditions. The theory and principles of the IFRS provide more room for interpretation and may often require lengthy disclosures on financial statements. However the principles of IFRS are more logical and better represent the clarity of business transactions. GAAP does not allow revaluation of assets, however IFRS allows to revalue at Fair Market Value.
Conclusion
GAAP is required to U.S. companies, which are listed in stock exchange, it is not required for private companies. Any company that has a large amount of international business and need to make more comparable financial statements, may need to use IFRS reporting.
Looking forward to how these updates will modernize processes and strengthen industry reputation!
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