Difference Between GAAP and IFRS (Essay Sample)

Difference between GAAP and IFRS
Name
Institution
Differences between GAAP and IFRS
Introduction
GAAP represents Generally Accepted Accounting Principles while IFRS represents International Accounting Standards Committee. GAAP is a collection of commonly recognized and accounting standards and rules used in financial reporting. The main purpose of GAAP is to ensure consistency and transparency in financial reporting among organizations. GAAP does not have uniform standards that can be applied globally hence GAAP standards and application differ geographically. IFRS is a collection of accounting standards and rules designed and modified to provide a framework that is global in nature that guides public companies on how to prepare as well as disclose their financial statements. Differences between GAAP and IFRS First GAAP is entirely based on rules while IFRS is principle based. A principle based system allows different interpretations for similar transactions while a rule-based system limits interpretations of operations that are similar and does not permit different interpretations for similar transactions (Horngren & Harrison, 1989). The second difference between GAAP and IFRS is based on methodology criteria used to access and determine the treatment of accounting. Under GAAP, research is mostly focused on the documented and accepted literature while under IFRS research primarily focuses on the review of the facts presented as well as facts pattern review. The third difference is based on how is treated. Under GAAP, companies are given a chance to choose whether to use FIFO or LIFO while under IFRS LIFO is not used. That means that companies using different financial reporting systems will have different financial reports due to the difference in methods used in calculating inventory movement. The fourth difference between GAAP and IFRS is based on the nature of items included or excluded from the statement of financial income. Under IFRS elements that are considered as extraordinary does not appear in the statement of financial income while under GAAP items considered as extraordinary are stated below the net income. The fifth difference between GAAP and IFRS is based on the underlying assumptions. Under GAAP, the going concern assumption is not explicitly developed in GAAP theoretical framework while under IFRS assumptions such as going concern and accrual basis are clearly defined, advocated for and given a high degree of importance (Horngren & Harrison, 1989). Accounting Implications There is a dire need to converge accounting standards to come up with one uniform accounting standards system. The convergence of IFRS and GAAP will help reduce differences between GAAP and IFRS. The convergence of GAAP and IFRS has been taking place for several decades. The breakthrough in the convergence of the two accounting standard is evident in USA where some companies have recognized IFRS standards alongside GAAP standards. GAAP is mostly used in the USA, and the recognition of IFRS standards by some companies proves that GAAP and IFRS standards can be used together (Jerman & Manzin, 2008). The SEC (Securities and Exchange Commission) is a good example of institutions that believe in convergence of GAAP and IFRS standards by taking steps that allow public companies in the USA to use IFRS standards Using a uniform accounting standard system has its challenges such as transition problems. Transition challenges occur as companies will be forced to change how they calculate their income and loss as well as the evolution in items included in the balance sheet. A uniform accounting standard system will affect the stock policy compensation system as there ...