Businesses and companies follow various accounting standards to prepare and present their financial statements. These standards regulate how companies account for transactions. Some countries may have their specific standards. However, most of these companies use variations of international standards already developed by standardized bodies.
When it comes to international accounting standards, there are two types of commonly used variations. The first one is the International Financial Reporting Standards (IFRS), which many countries and jurisdictions use. Some jurisdictions may customize some parts of those standards. On the other hand, the second one is Generally Accepted Accounting Principles (GAAP). This variation is only applicable in the US.
What are the International Financial Reporting Standards?
International Financial Reporting Standards (IFRS) represent a set of common rules applicable to accounting. These rules apply to any entity that prepares financial statements in jurisdictions where the IFRS is relevant. IFRS allows for a consistent, comparable, and transparent presentation of financial statements around the world.
There are various standards with the IFRS that relate to particular areas of accounting within a company. For example, there are specific standards for Property, Plant & Equipment, Intangible Assets, and Inventory. These all apply to different areas for businesses and other entities. The goal of these standards is to standardize the reporting process.
The International Financial Reporting Standards were previously known as International Accounting Standards (IAS). However, the IFRS got its name from the change in the body responsible for developing these standards.
Who is responsible for developing and maintaining the International Financial Reporting Standards?
The International Financial Reporting Standards (IFRS) come from the International Accounting Standards Board. It is an independent, private-sector body responsible for developing and maintaining the standards within the IFRS. The IASB was the successor of the International Accounting Standards Committee in 2001.
The International Accounting Standards Foundation also changed its name to the International Financial Reporting Standards Foundation (IFRS Foundation). Any standards developed during the previous foundation’s period come with the IAS tag. For example, the IAS 16 is the standard for Property, Plant, and Equipment, which is still applicable.
How do the International Financial Reporting Standards (IFRS) differ from the Generally Accepted Accounting Principles (GAAP)?
As mentioned, IFRS is applicable in several countries in the world. According to the latest count, 120 countries use the IFRS. On the other hand, the Generally Accepted Accounting Principles are only applicable in the US. However, that is not the only difference between these two. They also differ from each other in one other major aspect.
The IFRS takes a principle-based approach towards standardizing accounting. It may require more judgment and interpretation. However, it allows entities much better flexibility with the usage. On the other hand, GAAP uses a rules-based approach to accounting. This approach provides industry-specific rules and guidelines for each entity. However, it does not provide the same level of flexibility as the IFRS.
Apart from that, the IFRS and GAAP also vary from each other in specific accounting areas. For example, IFRS only allows the FIFO and weighted-average cost method of valuing inventory. GAAP, on the other hand, also allows the LIFO method. Similarly, there are various other areas where they may differ from each other as well.
Conclusion
The International Financial Reporting Standards is a set of common rules that aim to bring consistency, comparability, and transparency to financial reports. IFRS comes from the International Accounting Standards Board. These standards are prevalent in 120 countries worldwide. IFRS is different from the Generally Accepted Accounting Principles, which is applicable in the US.
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