For a Limited Time: Learning starts from only £149!
Enrol here for your complete online FA course with expert tutor James Griffiths.
That’s a seriously hot deal that will set you on the right path to getting the ACCA Financial Accounting course under your belt, but what can you expect when you study with us?
In this article, we give you a small taste of the course syllabus by discussing the differences between GAAP and IFRS. These two modalities are important because they lay out the international financial reporting standards according to which all financial statements and reports must comply.
In summary, GAAP stands for Generally Accepted Accounting Principles and is the trusted foundation for financial reporting in the United States. In the US, financial reporting practices are set forth by the Financial Accounting Standards Board (FASB). On the global stage, IFRS, which stands for Internal Financial Reporting Standards, led by the International Accounting Standards Board (IASB), takes the spotlight. These standards are more than just rules; they are the cornerstone of the financial world.
6 Key Differences Between GAAP vs. IFRS
Scope and Applicability
GAAP is primarily used in the United States, while IFRS is used in many countries around the world. IFRS is the most widely used system in the world, with over 110 countries using this method of accounting for publicly traded companies. GAAP is more focused on accounting rules, whereas IFRS is principles-based.
Consider revenue recognition for a software company:
Under GAAP, there are specific rules for recognising revenue from software sales, with criteria like VSOE (Vendor-Specific Objective Evidence) and standalone value.
Under IFRS, revenue recognition principles emphasize whether control of the software has transferred to the customer, allowing for more flexibility in different situations.
Under GAAP, the last-in, first-out (LIFO) inventory valuation method is allowed, but IFRS does not allow it. IFRS prefers the first-in, first-out (FIFO) method.
Suppose a company has rising inventory costs. Under GAAP, if it uses LIFO, it may report lower profits and lower taxable income compared to IFRS, where LIFO is not permitted.
Research and Development Costs
GAAP allows capitalisation of certain research and development costs, while IFRS generally expenses these costs as incurred.
Imagine a pharmaceutical company researching new drug compounds. Under GAAP, all research costs would be expensed immediately, whereas, under IFRS, some development costs may be capitalised if they meet the criteria.
GAAP used to have a distinction between operating leases and capital leases, while IFRS treats most leases as finance leases.
Practical Example #1:
In the past, a company leasing a building might classify it as an operating lease under GAAP but as a finance lease under IFRS, impacting how lease expenses were recognised.
Practical Example #2:
Suppose a company leases office space. Under both ASC 842 and IFRS 16, it would recognise a lease liability and a corresponding right-of-use asset on the balance sheet. Previously, under IFRS, this might have been treated as an operating lease with no balance sheet impact.
Financial Statement Presentation
IFRS tends to have a more condensed format for annual financial statements compared to GAAP. Under IFRS, extraordinary items are not allowed on the income statement, while GAAP permits them.
Practical Example #1:
Suppose a manufacturing company under GAAP presents its income statement with separate sections for operating income and non-operating items. Under IFRS, a similar company may choose to present expenses by function, making it easier to analyse the cost structure.
Practical Example #2:
A company under GAAP might use the indirect method for its statement of cash flows, starting with net income and making adjustments. Under IFRS, it may choose to use the direct method, providing more transparency in operating cash flows.
Practical Example #3:
A company that holds significant available-for-sale investments might, under GAAP, present comprehensive income separately. Under IFRS, it could choose to present both income and comprehensive income separately or combine them into a single statement, depending on its future reclassification plans.
Practical Example #4:
A company's balance sheet under GAAP may have current assets and liabilities listed before non-current ones. Under IFRS, the same company could choose to present assets and liabilities based on liquidity or function, potentially leading to a different order.
IFRS generally requires more extensive disclosures in financial statements compared to GAAP.
Practical Example #1:
Consider a software company that recognises revenue over time for long-term projects. Under both GAAP and IFRS, it must disclose information about how it recognises revenue, the amount of revenue recognized in the current period, and changes in contract liabilities.
Practical Example #2:
An investment company that holds financial instruments measured at fair value must disclose information about the valuation techniques used, the level of fair value hierarchy, and the impact of changing assumptions under both GAAP and IFRS.
Practical Example #3:
A company that enters into significant transactions with its subsidiaries or entities under common control must disclose the details of these transactions and the related parties involved under both GAAP and IFRS.
I want more practical examples
Yes, of course you do! Don’t we all? They’re damn helpful. Well, we have plenty more where these snippets came from and are willing to share.
You can unlock all 15 of VIVA's online ACCA courses here for 12 months for one low yearly fee. Find out more here.
The Origins of GAAP and IFRS
Some interesting reasons exist for why GAAP and IFRS were established. Every so often, the global financial systems fall prey to economic setbacks, some predictable and others a surprise.
The origins of GAAP can be traced back to several key events and developments in the history of accounting:
Industrial Revolution (Late 18th Century - Early 19th Century)
The rapid growth of industrialisation and commerce led to the need for more structured and standardised financial reporting. Businesses expanded, and investors sought reliable information to make informed decisions.
Wall Street Crash of 1929
The stock market crash of 1929 and the subsequent Great Depression highlighted the importance of accurate and transparent financial reporting. Many companies faced bankruptcy, and investor confidence was severely shaken.
Securities Exchange Act of 1934
In response to the financial turmoil of the Great Depression, the U.S. government passed the Securities Exchange Act of 1934. This legislation established the U.S. Securities and Exchange Commission (SEC) and gave it the authority to oversee and regulate the securities industry, including financial reporting by public companies.
Financial Accounting Standards Board (FASB):
In 1973, the FASB was established as an independent private-sector body to assume responsibility for setting accounting standards.
The origins of IFRS can be traced to the following key events and developments:
Globalisation of Markets
As international trade and investment increased in the latter half of the 20th century, there was a growing need for standardized financial reporting to facilitate cross-border business transactions. Companies and investors sought accounting standards that could be applied globally.
During the 1990s and early 2000s, there were efforts to converge international accounting standards with those used in the United States (GAAP). The convergence was driven by the recognition that global capital markets required greater consistency in financial reporting.
At this point, we’ve given you the key differences between GAAP and IFRS and discussed the relevance to you as an ACCA student with practical examples.
If you're looking to unlock example rich, practical tuition for ACCA, then VIVA has the total study solution for you. Our All Access membership (more info here) unlocks all 15 ACCA courses on VIVA's website for 12 months. With on-demand HD lectures from subject experts, integrated exam scenarios, practice questions and more!
Relevance for ACCA students
You would benefit significantly from knowing the differences between GAAP vs. IFRS for several reasons:
ACCA is an internationally recognised qualification, and students often aspire to work in global roles. IFRS is widely adopted across many countries, making it essential for you to understand this global accounting standard to work effectively in international finance and accounting positions.
Many multinational companies and organizations require professionals with expertise in IFRS accounting standards for roles in financial reporting, auditing, and consulting. ACCA students with knowledge of IFRS are better positioned to access a broader range of career opportunities, especially in global firms.
ACCA's comprehensive curriculum covers both GAAP and IFRS. Gaining proficiency in both sets of accounting standards ensures that you have a well-rounded education, making you more versatile and adaptable in your career.
International Clients and Audits
As ACCA professionals often work with clients or perform audits for companies operating internationally, an understanding of IFRS is crucial. Clients who follow IFRS will expect their ACCA advisors to know to provide accurate guidance and services.
ACCA students may work in countries or regions where IFRS is the mandated reporting standard for certain entities. Compliance with local regulations often requires familiarity with IFRS, ensuring that financial statements adhere to the appropriate accounting standards.
In a competitive job market. If you’re proficient in both GAAP and IFRS and have a competitive edge, it demonstrates your commitment to professional development and your ability to meet the diverse needs of employers and clients.
Global Accounting Trends
Being well-versed in both GAAP and IFRS allows ACCA students to stay current with global accounting trends and changes in accounting standards. This knowledge is valuable for maintaining accuracy and compliance in financial reporting.
Thanks for sticking around
Well, that’s it folks. We’ve come to the end of our GAAP vs. IFRS featured article. But since you’ve stuck around to the end, we’d like to give you some bonus content. Below, we share with you how you can expect this information to show up in the exam.
- Choice of Questions: In the FA exam, you may encounter questions that present financial information prepared under either GAAP or IFRS. You must analyse and interpret financial statements, apply relevant accounting standards, and make appropriate adjustments based on the chosen reporting framework.
- Comparative Analysis: Some exam questions may require you to compare and contrast how specific accounting transactions or events are treated under GAAP and IFRS. This assesses your understanding of the key differences between the two frameworks.
- Application of Standards: You may be asked to apply specific GAAP or IFRS standards to solve accounting problems or make accounting entries. This tests your ability to navigate the intricacies of each standard and apply them correctly.
- Adjustments and Reconciliations: Questions may involve reconciling financial statements prepared under one framework to align with the other framework. This assesses your skills in identifying discrepancies and making necessary adjustments.
- Scenario-Based Questions: ACCA often presents scenario-based questions that mimic real-world accounting situations. You must determine whether GAAP or IFRS principles should be applied in a given scenario and explain their choices.
- Interpretation of Financial Statements: You may be asked to interpret financial statements prepared under different reporting frameworks. This includes analysing the impact of differences between GAAP and IFRS on financial performance, position, and cash flows.
We could talk about Financial Accounting stuff all day but right now we have to run. If you’d like to explore award-winning accountancy tuition further, you can register with VIVA for a FREE TRIAL HERE and watch the first units of every single ACCA course on our website for free!