In the accounting world, there are a few different financial reporting standards that must be met. These standards can differ by country or region, but here in the United States, the two most common standards are that of International Financial Reporting Standards (IFRS) and General Accepted Accounting Principles (GAAP).
Let's get into these two different standards and how they work with auditing services and accounting firms.
GAAP
GAAP must be used for any company that distributes financial statements outside of the company. This would apply to companies that are publicly traded or that release their financials to the public in any way shape or form. If the company is also publicly traded, these financial statements would also need to comply with the standards set by the U.S. Securities and Exchange Commission.
GAAP standards are made up of things such as a balance sheet, item classification, revenue recognition, and share measurements that are outstanding. With how adopted GAAP is nationwide, as an investor, if you see financial statements that don't follow GAAP guidelines, you should definitely be suspicious of the validity of the company you are receiving them from.
GAAP also states that when financial data is released that does not follow GAAP guidelines, such as in press releases, that it should be disclosed as such.
IFRS
IFRS standards are meant to provide stability and transparency to financial records. IFRS standards help auditors and tax advisors to better see what has been happening with a company in order to allow those in charge to make better financial decisions.
IFRS standards are practiced in Europe, Asia, and South America. Over 144 countries around the world have adopted and instituted the use of IFRS standards. This makes IFRS the ultimate financial language to be used worldwide. Interestingly enough, these standards are not practiced in the United States due to the SEC not having made the switch yet. The SEC is continuing to review proposals to switch from GAAP to IFRS standards as the world is pressuring the USA to get on board with IFRS. The companies that benefit the most from IFRS standards are those that deal with a lot of international business and investing.
Main Differences
The key difference between these two standards is that IFRS is principles-based and GAAP is rules-based. Due to this, IFRS financial statements typically are not as detailed as GAAP reports. Because of this, IFRS reports may leave some figures up for interpretation, which can require more financial disclosure and explanation than figures done in GAAP format. With that being said, IFRS reporting is often more logically sound and may better represent the economic situation and factors of the transactions that businesses make.
Another huge difference is that of how inventory is treated. With IFRS standards, the use of last-in, first-out accounting methods are banned and are not used. GAAP allows for this to be used. GAAP also does not allow for inventory reversals, whereas IFRS does allow them under certain parameters and conditions.
Constantly Changing
Due to the complexity of international business and investments, the IFRS standards and guidelines constantly change. This is where using an auditing service that is familiar with, and has experience using IFRS is extremely important in order to help your business navigate the rules and principles that go along with this type of reporting. If you are a U.S.-based company, having a firm that can help you transition from GAAP over to IFRS is extremely important to ensure that your company can operate in an international environment when it comes to your financial records and investments.
A good firm can help convert your existing financial records over to the IFRS standard. They can also help you to shore up any areas of your reporting that need more transparency or that need to be analyzed in a different way. They can also help train your existing financial employees and accountants in a consultant role to help them understand how IFRS reporting works and to be able to stay within the guidelines when making and sending out financial statements.
Conclusion
As you can see, IFRS standards are the future way of recording financial statements and will most likely be adopted in the USA in the future. If more countries continue to adopt and use IFRS, it will provide one universal financial reporting language that all countries can understand and interpret, thus making it easier for companies to do business internationally as opposed to just operating domestically. With the inevitable move over from GAAP to IFRS, it's in your company's best interest to start making the transition now so that you are already prepared for when the switch to GAAP to IFRS inevitably happens. Choosing a firm that can help you to convert your existing statements, as well as provide training to your current employees can help to make this transition process even easier.
