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ACC6050 ACCOUNTING AND FINANCIAL
REPORTING
GAAP VERSUS IFRS
BY
ZULAIHA IZE USMAN
June 30, 2024
To: Ronald Duke
From: El-Twansey Accounting Services
Date: June 8, 2024
Subject: Understanding the differences between IFRS and US GAAP.
IFRS and US GAAP are two independent accounting standards used worldwide. IFRS
is principle-based, giving broad guidelines that may be applied to a variety of situations,
whereas US GAAP is rule-based, providing precise instructions and specific rules for distinct
scenarios. Under IFRS, revenue is recognised based on the transfer of control over goods and
services, with an emphasis on the contract's performance obligations. In contrast, US GAAP
emphasises the realisation principle, which states that revenue is recognised only when it is
realised or realisable and earned. In inventory costing, IFRS restricts the use of the Last In,
First Out (LIFO) approach, although US GAAP permits both LIFO and First In, First Out
(FIFO) (Ross, 2023). When it comes to development costs, IFRS mandates capitalization if
specific requirements are met, however US GAAP normally expenses development costs as
incurred. Furthermore, IFRS allows the revaluation of some non-current assets to fair value,
but US GAAP usually restricts revaluation except in specific industries.
Understanding these differences is important to businesses operating in the global
marketplace because any company operating in the United States must understand GAAP
standards in order to comply with local laws and regulations and also help in preparing
accurate financial statements. Secondly, if a business intends to expand internationally, the
adoption of either IFRS or GAAP can simplify communication with foreign stakeholders and
improve comparability with peers throughout the world. Furthermore, compiling consolidated
financial statements can be difficult for businesses undergoing mergers or acquisitions with entities that use multiple reporting standards, but this could be prevented if they understand
the differences between IFRS and GAAP (Soorya, 2024).
Considering that "different companies may perceive different revenue under each
accounting standards," it is highly arguable that the differences between these two accounting
standards might have an impact on financial statements. It might provide a problem for
investors, stakeholders, analysts, and the global market and result in disparate financial
statements (Westford Uni-Online,2024). The manner in which revenue is recorded and
acknowledged as an item in a company's financial accounts, as well as when it is recognised,
are determined by the revenue recognition principle. There are, in theory, several instances at
which businesses might recognise income. In general, revenue that is recognised early is
considered more valuable to the organisation but has a higher risk of reliability. IFRS
regulations prohibit revenue recognition before delivery for the sale of goods. Revenue
recognition after delivery is allowed under IFRS, nevertheless (Vipond, n.d.).
Prior to April 2001, the International Accounting Standards Board (IASB) was known
as the International Accounting Standards Committee (IASC), and it was solely responsible
for issuing international accounting standards. The IASB's accounting rules aim to ensure
financial reporting is transparent, accurate, and consistent across countries and industries
(International Accounting Standards Board: IASB, 2024).
The International Accounting Standards Board (IASB) plays an important role in the
attempts to converge accounting standards with the Financial Accounting Standards Board
(FASB). The IASB collaborates with the FASB in producing new accounting rules. They
discuss and examine each other's recommendations, hoping to identify common ground and
set standards with few discrepancies. They also provide collaborative reports on progress and areas where problems persist. This transparency fosters confidence and facilitates more
widespread adoption of convergent standards (Deloitte, 2019).
In conclusion, understanding the distinctions between IFRS and US GAAP is crucial for
making sound financial decisions when you expand your business operations into the United
States. The accounting standards you adopt can have a big impact on your financial
