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15 views5 pages

Gaap & Ifrs Notes

Uploaded by

santanu.mallick
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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IFRS

What Are International Financial Reporting Standards (IFRS)?

International Financial Reporting Standards (IFRS) set common rules so


that financial statements can be consistent, transparent, and comparable
around the world. IFRS are issued by the International Accounting
Standards Board (IASB). They specify how companies must maintain and
report their accounts, defining types of transactions, and other events with
financial impact.

IFRS were established to create a common accounting language so that


businesses and their financial statements can be consistent and reliable from
company to company and country to country.

International Financial Reporting Standards (IFRS)


KEY TAKEAWAYS
 International Financial Reporting Standards (IFRS) were established
to bring consistency to accounting standards and practices,
regardless of the company or the country.
 They are issued by the Accounting Standards Board (IASB) and
address record keeping, account reporting and other aspects of
financial reporting.
 IFRS benefit companies and individuals alike in fostering greater
corporate transparency.
 .

Understanding International Financial Reporting Standards (IFRS)

IFRS are designed to bring consistency to accounting language, practices and


statements, and to help businesses and investors make educated financial
analyses and decisions. The IFRS Foundation sets the standards to “bring
transparency, accountability and efficiency to financial markets around the
world… fostering trust, growth and long-term financial stability in the global
economy.” Companies benefit from the IFRS because investors are more likely
to put money into a company if the company's business practices are
transparent.

The U.S. Securities and Exchange Commission (SEC) has said it won't switch to
International Financial Reporting Standards but will continue reviewing a
proposal to allow IFRS information to supplement U.S. financial filings. GAAP
has been called "the gold standard" of accounting. However, some argue that the
global adoption of IFRS would save money on duplicative accounting work, and
the costs of analyzing and comparing companies internationally.

IFRS are sometimes confused with International Accounting Standards (IAS),


which are the older standards that IFRS replaced. IAS was issued from 1973 to
2000, and the International Accounting Standards Board (IASB) replaced the
International Accounting Standards Committee (IASC) in 2001.

IFRS are used in at least 120 countries, as of 2020, including those in


the European Union (EU) and many in Asia and South America, but the U.S.
uses Generally Accepted Accounting Principles (GAAP).

Standard IFRS Requirements


IFRS covers a wide range of accounting activities. There are certain aspects of
business practice for which IFRS set mandatory rules.

 Statement of Financial Position: This is also known as a balance sheet.


IFRS influences the ways in which the components of a balance sheet are
reported.
 Statement of Comprehensive Income: This can take the form of one
statement, or it can be separated into a profit and loss statement and a
statement of other income, including property and equipment.
 Statement of Changes in Equity: Also known as a statement of retained
earnings, this documents the company's change in earnings or profit for
the given financial period.
 Statement of Cash Flow: This report summarizes the company's financial
transactions in the given period, separating cash flow into Operations,
Investing, and Financing.

In addition to these basic reports, a company must also give a summary of its
accounting policies. The full report is often seen side by side with the previous

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report, to show the changes in profit and loss. A parent company must create
separate account reports for each of its subsidiary companies.

GAAP
GAAP, or Generally Accepted Accounting Principles, is a commonly recognized set
of rules and procedures designed to govern corporate accounting and financial
reporting in the United States (US). The US GAAP is a comprehensive set of
accounting practices that were developed jointly by the Financial Accounting
Standards Board (FASB) and the Governmental Accounting Standards Board
(GASB), so they are applied to governmental and non-profit accounting as well.

US securities law requires all publicly-traded companies, as well as any company that
publicly releases financial statements, to follow the GAAP principles and procedures.

In addition, or as an alternative, are the International Financial Reporting Standards


(IFRS) established by the International Accounting Standards Board (IASB). The IFRS
rules govern accounting standards in the European Union, as well as in a number of
countries in South America and Asia.

The Core GAAP Principles


GAAP is set forth in 10 primary principles, as follows:

1. Principle of consistency: This principle ensures that consistent


standards are followed in financial reporting from period to
period.
2. Principle of permanent methods: Closely related to the
previous principle is that of consistent procedures and practices

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being applied in accounting and financial reporting to allow
comparison.
3. Principle of non-compensation: This principle states that all
aspects of an organization’s performance, whether positive or
negative, are to be reported. In other words, it should not
compensate (offset) a debt with an asset.
4. Principle of prudence: All reporting of financial data is to be
factual, reasonable, and not speculative.
5. Principle of regularity: This principle means that all accountants
are to consistently abide by the GAAP.
6. Principle of sincerity: Accountants should perform and report
with basic honesty and accuracy.
7. Principle of good faith: Similar to the previous principle, this
principle asserts that anyone involved in financial reporting is
expected to be acting honestly and in good faith.
8. Principle of materiality: All financial reporting should clearly
disclose the organization’s genuine financial position.
9. Principle of continuity: This principle states that all asset
valuations in financial reporting are based on the assumption
that the business or other entity will continue to operate going
forward.
10. Principle of periodicity: This principle refers to entities
abiding by commonly accepted financial reporting periods, such
as quarterly or annually.

US GAAP Standards

GAAP is merely a set of standards. Although its principles work to


improve the transparency in financial statements, they do not provide

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any guarantee that a company's financial statements are free from
errors or omissions that are intended to mislead investors.

The SEC has stated that it intends to move from GAAP to the
International Financial Reporting Standards (IFRS). But the latter differ
considerably from GAAP and progress toward adoption or convergence
has been slow. (See International Financial Reporting Standards
(IFRS).)

While GAAP itself is not government-regulated, it exists because of the


combined efforts of government and business. The use of GAAP is not
mandatory for all businesses, but SEC requires publicly traded and
regulated companies to follow GAAP for the purpose of financial
reporting.

Companies that issue stock are held to this standard by SEC, which
requires yearly external audits by independent accountants, but
companies without external investors are not obliged to follow this
standard. Despite the mandate, the SEC is not responsible for the
standards associated with GAAP. Instead, the Financial Accounting
Standards Board (FASB) actively influences any changes in financial
reporting standards used at the corporate level. The FASB Advisory
Council (FASAC) advises the FASB on all matters that may influence
GAAP rules.

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