Running head: WEEK 3 ASSIGNMENT 1
Week 3 Assignment
Schiller International University
WEEK 3 ASSIGNMENT 2
Week 3 Assignment
GAAP, or US General Accepted Accounting Principles, is a collection of rules, standards,
specifications, and concepts for financial reporting. There is also the IFRS, or International
Financial Reporting Standards, which is used in over 110 countries in the world. While the two
extremely different standards are both used as accounting frameworks, the USA is heavily
considering switching from GAAP to IRFS. I personally believe this would be beneficial to
American companies and investors because of the global compatibility of their financial
statements and the consistency this will bring.
GAAP vs IFRS
The main difference between the GAAP and IRFS is that the GAAP is rule based, whereas the
IRFS is principle based. This means that the GAAP includes more literature focused research, as
opposed to a review of fact patterns for the IFRS. This can mean a huge difference in
interpretation even for the same transactions. Some main differences are the documents required
in financial statements and their interpretation. For example, in IFRS, a balance sheet, income
statement, changes in equity, cash flow statements, and footnotes are all required in the financial
statements while in GAAP one would have to add the statement of comprehensive income.
Another difference is the description for assets, development costs/expenses, and intangibles. For
inventory estimates, IFRS uses the FIFO technique (first in, first out), or weighted average cost.
GAAP also uses this technique along with the LIFO (Last in, first out). Inventory reversal is
prohibited under GAAP while it’s permitted only under certain criteria for IFRS. While they
both share similar objectives for their financial statements, their qualitative characteristics are
different. While GAAP focuses on relevance, reliability, comparability is not the priority, and
WEEK 3 ASSIGNMENT 3
understandability is user specific. IFRS also focuses on relevance and reliability, but more so on
generalization, and cannot base a decision on specific circumstances.
Benefits of IFRS
I believe one of the first major benefits of the USA going from GAAP to IFRS is the fact that
more than 22,000 pages of rules and standards will be deducted. Since the IFRS is more principle
based, it doesn’t need to have the industry-specific methodology that GAAP often uses to
recognize revenue. For companies, a benefit will be capitalizing what were once considered
expenses such as research and development, advertising costs, and goodwill. This will help to
portray a strong balance sheet by allowing companies to report the fair market value of assets
(less accumulated depreciation). Switching to IFRS would also be advantageous to the American
economy and businesses overall by facilitating the comprehension of financial statements.
