Comparing Ifrs to Gaap Paper

Comparing IFRS to GAAP Paper

Kristopher Watkins

May 23, 2016

James Gajda

Comparing IFRS to GAAP

Primarily there are two main types of accounting systems used in today's emerging markets: International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). Both types of accounting systems follow double entry practices in order to record and categorize transactions a expense/liability or revenue/asset. Although both types of systems share similarities there are also some differences between the two. One of those differences being their conceptual framework where GAAP is mostly rule based and IFRS is principle based. Additionally, IFRS prefers a control model differing from U.S. GAAP who prefers a risks-and-rewards model. "Under IFRS, LIFO (a historical method of recording the value of inventory, a firm records the last units purchased as the first units sold) cannot be used while under U.S. GAAP, companies have the choice between LIFO and FIFO (is a common method for recording the value of inventory)" (Forgeas, 2008).

Within this paper I am going to go further into detail about the differences of these two accounting systems. This will mostly detail how financial statements and conceptual frameworks differ between each system, IFRS terms synonymous with common stock and balance sheets, and revenue recognition rules under IFRS and GAAP. I will also explain whether definitions of revenues and expenses include gains and losses under IFRS. Additionally I will detail competitive implications of the Sarbanes-Oxley Act (SOX) of 2002.

In regards to IFRS and GAAP the format of a statement of financial or position under IFRS will differ from a balance sheet presented under GAAP. Most commonly companies will order assets in a reverse order of liquidity The IFRS does not require a specific order of classification within the statement of financial position. IFRS does not segregate extroardinary items, whereas under GAAP they are inserted below net income. Under IFRS, an example of how the accounts would be ordered on a financial position sheet would be: Long-Term assets, Current assets, Shareholder Equity, Long term Liabilities, Current Liabilities.

Under GAAP, it is required to order accounts by their degree of liquidity. The first that is generally reported is cash and last would be non-current assets. An example of how accounts are reported under GAAP would be: Current asset, Long term assets, Current liabilities, Long term liabilities, Shareholder Equity. Some other differences include, according to Forgeas (2008), under IFRS the earning-per-share calculation does not average the individual