Accounting is an important activity to understand the financial health of an organisation and determines the business activities. The two most common accounting standards are IFRS and GAAP. If you are thinking about doing a certification course and have to choose one of the two, this article will help you to make the right decision.
Accounting standards are usually guidelines for accounting, usually set by a governing body, to help firms to present its income, expenses, assets and liabilities in a set standard method.Let’s discuss the IFRS and GAAP differences.
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IFRS (International Financial Reporting Standards) is a set of accounting standards developed by the independent, not-for-profit organisation, International Accounting Standards Board (IASB). It was done with a goal to provide a global framework for the preparation of financial statements rather than industries or organisations adopting their own methods. Currently, this method is used by organisations in more than 100 countries.
Generally Accepted Accounting Principles (GAAP) is another set of accounting standards and unlike IFRS, there is no universal GAAP standard. It varies from one geographical location or industry to another. Though GAAP is used in some of the countries, IFRS is being adopted increasingly.
Though IFRS and GAAP are two of the widely used standards in accounting, there are a number of differences that you need to understand to find out which one is perfect for you:
- Conceptual Approach – The major difference between the two approaches lies in the conceptual approach. The GAAP standard is based on rule, where the focus is more on the literature. IFRS, on the other hand, is principle-based and review of the facts pattern is more thorough.
- Geographical dominance in terms of usage – The GAAP standard is popular in the USA; though there is a shift towards IFRS in the recent years. The IFRS standard is the most popular standard globally and is used across more than 110 countries, including the European Union.
- Inventory – Under IFRS standard, the LIFO method cannot be used whereas under the GAAP standard, there is the choice between LIFO and FIFO.
FIFO (first in, first out) means that the goods first added to an inventory are assumed to be the first goods removed from inventory for sale. LIFO (last in, first out) means that the goods last added to the inventory are assumed to be the first goods removed from the inventory for sale.
- Objectives of financial statements – GAAP provides separate objectives for business and non-business entities. IFRS provides the same set of objectives for business and non-business entities.
- Development costs – The development costs can be capitalised under IFRS, whereas it is considered as expenses under GAAP.
- Inventory reversal – Under IFRS, if an inventory is written down, the write down can be reversed in future periods if specific criteria are met but in GAAP, once inventory has been written down, any reversal is prohibited.
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Which one is best-suited for you?
Choosing to do a certification course in one of the two accounting standards is a simple decision. It all depends on your geographical location and the industry you are in. If you are looking to work in the US or working for US-based organisations, GAAP is going to be the best one for you. Otherwise, IFRS is perfect as it is widely accepted across the world and a greater percentage of the organisations globally are adopting the IFRS standard.