Ifrs Vs. Gaap: How These Sets of Accounting Standards Differ

IFRS vs. GAAP: How These Sets of Accounting Standards Differ

The accounting industry is full of guidelines, regulations, and oversight committees that dictate how transactions should be recorded and reported. Entities such as the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) have been set up to keep a watchful eye on financial proceedings, and specific rules have been laid out that dictate how accountants should do their jobs. While all of these rules and restrictions may seem overly strict or arbitrary, especially to those outside the accounting world, they’re actually quite necessary when you stop to consider the repercussions of (criminally) incorrect accounting practices, the most egregious of those being the Enron/Arthur Andersen scandal of the early 21st century.

Because accounting plays a huge role behind the scenes of practically any and every operation, be it a multi-national corporation, a local hardware store, a charity, whatever, entire textbooks could be written about the various rules of how they should operate. Today, we’re just focusing on two of the major sets of accounting guidelines and how they differ: the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP). If the worlds of accounting and finance are totally new to you, check out this intro course on financial accounting, and this article on the basics of finance to learn more about these complex industries.

What Are IFRS and GAAP?

These two frameworks of guidelines dictate the rules and standards of how financial accounting should operate. GAAP is considered to be more “rules based”, meaning there are hard and fast boundaries that dictate whether or not a practice is acceptable, whereas IFRS is more “principles based”, meaning it lacks explicit sets of guidelines, but rather has overarching principles and standards that say how things should be done, which can result in differing interpretations of the same interaction. This course on IFRS explains the key principles and theories behind this set of accounting standards.

The accounting practices laid out by GAAP represent the framework for how most accounting is, and has been, done in the United States since around the 1930s. While they haven’t been too much of an issue in and of themselves, the biggest issue is the fact that the rest of the world doesn’t adhere to these standards. IFRS, however, is practiced in 110 foreign countries and counting, and can even be considered the more dominant of the two, in that changes in GAAP are influenced by the concepts of IFRS. The problem that arises is when American businesses, adhering to GAAP, interact with businesses overseas that rely on IFRS, and discrepancies arise in their respective accounting practices. There is currently an effort being made to make a universal set of accounting standards that businesses around the world can follow,hopefully by the year 2015.