In addition, extraordinary items are prohibited under IFRS; whereas, under GAAP, entities must report extraordinary items if they are unusual in nature and infrequent in occurrence. In order to assure the comparability of financial statements, all companies should follow the same rules by adopting IFRS. 2014-09 (Topic 606) and the corresponding IFRS standard, IFRS 15, share a common principles-based approach. Regarding net income, non-GAAP use has increased 33% from 1998 to 2017 and 97% of the companies in the S&P 500 used non-GAAP adjustments in 2017, up from 59% in 1996. Include an introduction and a conclusion. Interpretivism (interpretivist) Research Philosophy, The first factor is that IFRS promise more accurate, timely and comprehensive financial statement information that is relevant to the national standards. The first factor is that IFRS promise more accurate, timely and comprehensive financial statement information that is relevant to the national standards. Keyboard Shortcuts ; ... International Financial Reporting Standards, or IFRS.…The IASB approach to accounting standards relies more…on the exercise of professional accounting judgment,…rather than on the use of a checklist. And this will be strengthened if IFRS is adopted by the US companies. This helps the companies and other stakeholders to have true and fair view of the companies’ transactions. IFRS: Pros and Cons for Investors* *Ray Ball, “International Financial Reporting Standards (IFRS): Pros and Cons for Investor.” 2007, Accounting & Business Research Outline Potential pros and cons of IFRS Fair Value Accounting Implementation Longer Run Concerns Conclusions Exploring a buyout from potential investors who are unfamiliar with ASPE or who will require adoption of IFRS prior to acquisition; Reporting to a parent company that applies IFRS in their consolidated financial statements; or; Entering foreign markets or raising capital with institutions that require IFRS-compliant financial statements. IFRS allows revaluation of the following assets to fair value if fair value can be measured reliably: inventories, property, plant & equipment, intangible assets, and investments in marketable securities. Moreover, there has been no significant achievement in terms of usefulness and improved comparability of financial statements in the short term which is mainly due to the fact that the IFRS reporting standards is fairly new  as a reporting standard and the harmonization has not fully been achieved yet by all EU member countries. IFRS includes the distinct category of investment property, which is defined as property held for rental income or capital appreciation. Due to the gap between the market and book values, the local stock market gets adversely affected when the IFRS is applied in line with other national reporting standards. However, before companies can start enjoying the cost savings, they have to spend considerable amount of money as a transitional costs. IFRS is used in more than 110 countries around the world, including the EU and many Asian and South American countries. However, in GAAP, going concern period is taken as generally 12 months from the balance sheet date or 12 months from the date the financial statements are released. © 2019 Intuit Limited. Under GAAP, revaluation is prohibited except for marketable securities. Any separate components of an asset with different useful lives are required to be depreciated separately under IFRS. With increased transparency as promised by IFRS, the lenders also benefit from IFRS as it makes it compulsory for the companies recognize the loss immediately. IAS 1 , Presentation of Financial Statements , encourages preparers to include additional line items, headings and sub-totals on the face of the income statement when such presentation is relevant for an understanding of the entity's performance, especially in respect of some infrequent transactions. For software that will be used externally, costs are capitalized once technological feasibility has been demonstrated. Both GAAP and IFRS allow First In, First Out (FIFO), weighted-average cost, and specific identification methods for valuing inventories. For more information, visit www.firmofthefuture.com. Write a 700- to 1,050-word summary of the differences of IFRS versus GAAP. The new IFRS reflects on economic substance more than legal form. This timelier loss recognition of IFRS, triggers the issues as when the companies face economic losses, it will be known to the stakeholders of other potential investors. However, in the U.S., GAAP (General Accepted Accounting Principles) is applied. And if there is competition, such IFRS vs. GAAP, there is more chance of having reliable and useful information that will be produced during the course of competition. Internal costs to create intangible assets, such as development costs, are capitalized under IFRS when certain criteria are met. If you ask me, the cons outweigh the pros in moving to IFRS from GAAP. While many countries worldwide have already adopted IFRS, many other countries are closely examining its effects before adoption, not only Critics against the adoption of IFRS in the United States argue principle based accounting standards leave too much of a judgment call in the hands of the preparer. IFRS In this presentation I’m going to be talking about different aspects of IFRS. For over the past decade, there has been a growing demand in the corporate world for U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) to converge to form one set of universal accounting standards. Moreover, the following points mark additional advantages of IFRS compared to GAAP. The U.S. is one of the last GAAP holdouts but that could change by 2014. IFRS and U.S. GAAP are very similar in many areas, but do have some slight differences that create pros and cons for each. Another reason that has contributed to the overall success of the IFRS adoption has been due to the transition period, as more than 8000 listed companies in the EU adopted it in the same year. And the information provided by financial statements prepared under IFRS tends to be more understandable for investors as they can understand the financial statement witho… The total cost of transition costs for the US companies will be over $8 billion and one off transition costs for small and medium sized companies will be in average $420,000, which is quite a huge amount of money to absorb by companies. No reporting method is perfect, but GAAP appeals well to the U.S. financial statement user and is a familiar format. Under IFRS, these same assets are initially valued at cost, but can later be revalued up or down to market value. The purpose of my research is to identify what are the differences between the two. U.S. GAAP vs. IFRS: Property, plant and equipment and investment property Keywords Currently, more than 120 countries require or permit the use of International Financial Reporting Standards (IFRS), with a significant number of countries requiring IFRS (or some form of IFRS) by public entities (as defined by those specific countries). IFRS has no specific guidance for software. However, the comparability of financial statements get worse if the same country uses two different sets of reporting standards, thus IFRS and national reporting standards. However, convergence projects between FASB and IASB have resulted in new GAAP and IFRS standards that share more similarities than differences. And this has been mainly achieved and still going to be achieved as more and more countries around the world have been converting to IFRS from their national reporting standards as mentioned during the interview. Pros and Cons of U.S.-GAAP and IFRS The broad conceptual difference between GAAP and IFRS is that GAAP is rules-based and IFRS is principles-based. And the interviewers think that this principle will bring increased volatility as the assets are reported. They key problem in conversion to IFRS that has stressed with high importance is the use of fair value as the primary basis of asset and liability measurements. Purpose and Scope Gaap and Ifrs are two different standards that have been followed for years. There is another noticeable difference. The most noteworthy disadvantage of IFRS relate to the costs related to the application by multinational companies which comprise of changing the internal systems to make it compatible with the new reporting standards, training costs and etc. Under IFRS, however, the impairment is equal to the difference between the carrying value and the fair value of the entire entity. Instead of using multiple accounting standards based on the preference of each country where an organization does business, adopting the International Financial Reporting Standards would enable agencies from different segments of the globe to apply the same standards in every transaction. One huge difference is that IFRS is principle-based, while U.S. … The wide conceptual difference between GAAP and IFRS is that GAAP is rules-based and IFRS is principles-based. And this is another reason for the lack of comparability and inconsistency, And companies are not confident that the IFRS is adequate for the purposes of communicating their performance to the financial markets, as GAAP reporting standards tended to be more detailed which could provide more detailed information. The main difference being, the IFRS is considered more of a "principles based" accounting standard whereas, U.S. GAAP is considered to be more "rules based". The International Financial Reporting Standards, or IFRS, employ more principles-based accounting, while the U.S.' Generally Accepted Accounting Principles, or GAAP, have more rule-based standards. All rights reserved. And the relevance of the IFRS can be mentioned as a substantial advantage due to the following reasons: Moreover, other benefits as mentioned during the interview are cost saving with new IFRS especially for multinational corporations. Due to harmonization and standardization of reporting standards under IFRS, the investors do not need to pay for processing and adjusting the financial statements to be able to understand them, thus eliminating the fees of analysts. One major difference between GAAP and IFRS is their methodology, with GAAP being rules-based and the latter being principles-based. This contradicts the aim of the EU and partly of IFRS in implementing single international reporting standards. GAAP has no such separate category. The summary should be structured in a subject-by-subject format. Conversion from U.S. GAAP to IFRS is a heavily discussed topic in the corporate world. IFRS has a de minimus exception, which allows lessees to exclude leases for low-valued assets, while GAAP has no such exception. Editor’s note: This article was updated with new content on Jan. 21, 2020. U.S. Generally Accepted Accounting Principles (GAAP) is only used in the United States. Pros/Cons Ifrs Convergence W/ Us Gaap . Issues such as extraordinary loss/gain which are not allowed in the new IFRS still remain an issue. Some countries find it useful to choose Ifrs over Gaap, but not the United States. If the software will only be used internally, GAAP requires capitalization only during the development stage. And the companies have adopted an approach which minimized the changes from previous national standards which reduced the ability to compare the financial statements across an industry. And it is hoped that the usefulness and improved comparability of IFRS may be achieved in the medium-long term. As thousands of companies in Europe and other joining countries across the world has already created a huge base for IFRS adoption, it also improves the companies to access to financial markets by having the financial statements prepared under one reporting standards. You can just continue to treat them as operating leases under 840. Investors and other stakeholders need to be aware of these differences so they can correctly interpret financials under either standard. This also removes the trade barrier, as this was one of the key factors as why the EU has been trying to adopt single reporting standards. GAAP takes a more conservative approach and prohibits reversals of impairment losses for all types of assets. However, if the market value later increases, only IFRS allows the earlier write-down to be reversed. And another disadvantage of IFRS is that IFRS is quite complex and costly, and if the adoption of IFRS needed or required by small and medium sized businesses, it will be a big disadvantage for SMEs as they will be hit by the large transition costs and the level of complexity of IFRS may not be absorbed by SMEs. This also helps to reduce the risk for new or small investors while trading as professional investors can not take advantage due to the simple to understand nature of financial statements. And eventually, the adoption of IFRS by all countries around the world gives even more increased usefulness and comparability of financial statements. IFRS, as an alternative to GAAP, is a methodology guided by published standards and principles that accountants in foreign countries use to prepare financial statements for public companies. Reducing international differences in reporting standards by applying IFRS, in a sense removes a cross border takeovers and acquisitions by investors. Timelier loss recognition also enables the company review its book values of assets and liabilities, earnings, equity. As such, the IFRS is considered more thoughtful, transparent and reflective of the true nature of each transaction. GAAP tends to be more rules-based, while IFRS tends to be more principles-based. Accounting to IFRS, the going concern is for a period defined as the foreseeable future. Generally Accepted Accounting Principles (GAAP) to the International Financial Reporting Standard (IFRS). Gaap is used in the US and Ifrs is used in over 110 countries around the world. The existing IFRS guidance does not provide much guidance on non-GAAP performance measures. The following is the arguments against the lack of comparability and consistency of IFRS: Due to the strong national identity of IFRS reports, as the main effects of IFRS has been on how companies recognize, measure and disclose items. In 2002, members of the Financial Accounting Standards Board (FASB) and members of the International Accounting Standards … IFRS has been adopted by more than 12,000 companies in over 100 nations and is becoming the global standard for the preparation of financial statements of public companies throughout the world. Let’s look at the 10 biggest differences between IFRS and GAAP accounting. Using the LIFO method may result in artificially low net income and may not reflect the actual flow of inventory items through a company. However, GAAP also allows the Last In, First Out (LIFO) method, which is not allowed under IFRS. Understanding these differences between IFRS and GAAP accounting is essential for business owners operating internationally. International Financial Reporting Standards (IFRS) – as the name implies – is an international standard developed by the International Accounting Standards Board (IASB). When conditions change, IFRS allows impairment losses to be reversed for all types of assets except goodwill. Inventory valuation may be more volatile under IFRS. Under both GAAP and IFRS, there is a short-term lease exemption, which means you don’t have to capitalize those leases and record them on your balance sheet. Another major disadvantage of converting to IFRS makes the IASB the monopolist in terms of setting the standards. Both methods allow inventories to be written down to market value. Under GAAP, reversal of earlier write-downs is prohibited. Under GAAP, the standard regarding going concern is defined under AU Section 341. GAAP requires that long-lived assets, such as buildings, furniture and equipment, be valued at historic cost and depreciated appropriately. Under GAAP, companies may have industry-specific rules and guidelines to follow, while IFRS has principles that require judgment and interpretation to determine how they are to be applied in a given situation. 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