How Long After Switching Formula Should I See A Difference GAAP Vs IFRS: A Look at the Benefits of IFRS and the Differences Between GAAP and IFRS

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GAAP Vs IFRS: A Look at the Benefits of IFRS and the Differences Between GAAP and IFRS

The globalization of business has invited the accounting field to join the movement. This movement goes from GAAP, which stands for Generally Accepted Accounting Principles, which creates accounting guidelines for the United States, to IFRS, which stands for International Financial Reporting Standards. The International Accounting Standards Board adopted IFRS in 1989 to create principles-based standards and interpretations. With more than 110 countries adopting IFRS and more and more ready to transition to adapt to the standards, the US decided to take this step. The United States has set a target date of December 15, 2014 for the full use of IFRS in financial reporting. I will explain the benefits of switching to IFRS and some of the differences between IFRS and GAAP.

The U.S. wants to move toward a global accounting standard because it could reduce the cost of preparing and interpreting financial statements. It can get very complex and complicated when accountants have to review two different types of accounting standards, so the idea of ​​one set of standards makes everything clearer. Having a global accounting standard also reduces capital costs, which is always good for the country.

The US market sees many benefits from this transition to IFRS. This will see better global comparability and more efficient capital allocation for investors. This increases the credibility of local markets in the eyes of foreign investors, which can help lift the economy out of the recession that the 2008 market crash left us in. There is no need to develop and maintain national standards as we would be under international standards.

Companies would also benefit from the move in a number of different ways. Thanks to the new standards, they would lower capital costs. IFRS would make consolidation and cross-border acquisitions much easier for companies. This would lead to the promotion of integrated IT systems that would connect the world. These are all examples of how companies can benefit from IFRS.

One of the first clear differences between the two is that GAAP is rules-based and IFRS is principles-based. In a principles-based accounting system such as IFRS, the emergence of the field of interpretation can be explained by a standard-setting board. It provides fewer exceptions compared to a rule-based accounting system that provides a clearer explanation. This advantage of fewer exceptions makes IFRS a more ideal accounting system to use.

GAAP and IFRS are very different when it comes to revenue recognition. Under GAAP, revenue is either realized or realizable and earned. This revenue recognition involves an exchange transaction, which means that revenue should not be recognized until the exchange has taken place. On the other hand, IFRS recognizes revenue through four different types of revenue transfers. These four transactions are the sale of goods, the provision of services, the use of the entity’s assets by others, and construction contracts. For each of these categories, it is likely that the economic benefits associated with the transaction will flow to the entity and that the income and expenses can be reliably measured. These principles, which apply to each category, have no additional rules or acceptances, which again require a clearer explanation.

There is also a clear difference between the two standards when dealing with inventories. GAAP FIFO, LIFO, and average cost methods are all allowed. A uniform cost formula is not expressly required for all inventories that are similar in nature. Under IFRS inventory standards, the LIFO method is prohibited and the same cost formula must be applied to all inventory that is similar in nature or use to the business. Although GAAP does not prohibit all three cost methods due to IFRS prohibiting LIFO, this gives the United States an equivalent inventory method to many other international countries. This similarity makes doing business between countries much more attractive and easy.

The transition to IFRS is clearly one that will bring the US into line with the rest of the world. The world will have one accounting language that will make doing business much easier than it is now. The two-standard system creates difficulties in distinguishing the concepts. Globalization has finally reached accounting and the benefits are endless.

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