Differences Between GAAP And IFRS Financial Statements

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. 

How To Choose an Accountant for Your Business

Choosing a tax professional and accountant for your business needs can be an intimidating thought, but not as scary as trying to do it all yourself. To get the best service for your needs, it is a good idea to first consider whether hiring a firm or bringing in someone full-time is the best route for your company. You can then compare candidates based on experience, certifications, and referrals to find the best fit.

In-House or Outsourced

In-house teams will require a room on your premises and enough work to stay busy but are also right down the hall when needed and part of the company culture. Outside firms, such as TPI Group, are more affordable because you pay a rate proportionate to the amount of work you send over, allowing firms to split their costs between multiple clients. Many of these firms and individuals use innovative software and hardware solutions to be readily available to clients.

Certifications and Tools

Regardless of whether you go with an in-house or outsourced accountant, you will want to check what certifications he or she has and which tools are being used on your accounts. Going with someone with a CPA means that you are hiring someone who has passed the tests and does continuing education to say certified. This can give you more confidence in the quality of the work.

The right tools can help your accounting team instantly import invoices from the point-of-sale system to the bookkeeping spreadsheets, calculate quarterly taxes and manage payroll and benefits. Some will even provide one dashboard for your company and the outside firm to see the same information in real-time.

Referrals and Interviews

When you have narrowed down your candidates, it is time to look at referrals and testimonials before scheduling an in-person interview. It is recommended to look at both the good and bad reviews for an accountant to see how problems are handled and give you an idea of what to expect. The interview process should focus on any questions or concerns you have about the qualifications of the individual or firm as well as getting to know the person you will be potentially working with. You can even ask for clarification on some of the testimonials or referrals you have received for the firm or individual and talk about the software and hardware tools each accountant uses.

Choosing the right accountant or firm for your company’s taxes, bookkeeping, and payroll is about putting in the research time. This means deciding whether to go in-house or outsourced, determining which certifications and tools to look for and reading reviews and testimonials before scheduling interviews.