IFRS and GAAP – What is the difference?
16

Jul 2020

There has been a visible increase in the number of businesses all over the world. The United Arab Emirates is no stranger to the gradual rise in the businesses coming into the country. All the businesses are required to adhere to certain accounting standards while preparing the necessary financial documents of the company.

There are mainly two different types of accounting standards in use all around the globe. These two accounting standards are:

  1. IFRS – International Financial Reporting Standard
  2. GAAP – Generally Accepted Accounting Principles

IFRS is an international standard that is used by more than a hundred countries whereas GAAP is also an accounting standard which mostly used in the US. The International Financial Reporting Standard (IFRS) was developed by the International Accounting Standards Board (IASB) whereas the GAAP was developed by the Financial Accounting Standards Board (FASB).

Difference between GAAP and IFRS

There are many differences between IFRS and GAAP. The major difference between these two accounting standards are:

Basis

GAAP

IFRS

Guidelines

  • If a company is under GAAP, they have to follow industry-specific guidelines. This is being rectified in the new GAAP principles but still, there are many companies that are not properly following this.
  • Under IFRS, the company management needs to interpret the situations and accordingly apply the given principles. IFRS tends to be more principle-based.

Geographical Area

  • GAAP is used mostly in the United States of America.
  • This is an international standard and is used by more than 110 countries.

Method of Inventory

  • There is one extra method of valuation of inventory available to the companies which are using GAAP. This is the Last In First Out (LIFO) Method.
  • The IFRS allows Weighted Average Method, First in First Out (FIFO) method, and other inventory identification methods.

Revaluations

  • According to GAAP, the revaluation of all the assets and liabilities is prohibited. The only exception to this rule is marketable securities.
  • Under IFRS the revaluation of assets such as plant and equipment, property, intangible assets, etc. may either increase or decrease in value.

Fixed Assets

  • According to GAAP, capital assets such as buildings, furniture, machinery etc. need to be valued at historic costs and the depreciation of these tangible assets will occur accordingly.  
  • Under IFRS all the assets should be initially valued at the actual cost but after some time the asset should be revalued to the market value of the asset.

Intangible Assets

  • The development costs of a company are reported as incurred under GAAP. The only exception to this rule is any internally developed software.
  • All the intangible assets which are created due to the internal costs of the company such as developmental costs etc. are capitalized under IFRS

Treatment of Costs

  • There can be a deferral or accrual of costs in a company due to the allocation of the costs which are more benefits causing to the company in any of the interim period of the company.
  • According to IFRS a cost if does not meet the requirements to be defined as an asset is not deferred and similarly, a liability which does not represent an obligation is not deferred.

Accounting for Lease

  • Under GAAP all the intangible assets are excluded from the purview of the scope of accounting standard
  • IFRS has a small exception under which it allows the lessees to exclude all the leases for the low valued assets of the company.

 

The understanding of the differences between the two accounting standards is very important for the management of a company. These differences can amount to a huge difference in the way the financial records of a company are created and maintained. This is why the management should take special care of using the required accounting standard. The management also requires to be compliant with a particular standard which may be a hectic process for the management of a company.

In the United Arab Emirates, the accounting standard which a company needs to follow is IFRS. If your company is looking for a financial service such as Accounting Services, Audit Services, Vat and Tax related services, etc. then you must look into the services of JAXA Chartered Accountants. JAXA is an ISO 9001-2015 certified firm that uses IFRS as the accounting standard. The experts at JAXA are dedicated to providing customized solutions to the financial problems of the clients. For more information on the services JAXA Chartered Accountants provide, Contact Us. We will be happy to help.