IFRS and Accounting Standards
Differences
Inventory Management
The FIFO approach is used under IFRS.
(reason: We do not adopt LIFO under IFRS (International Financial Reporting Standards) since it may represent lower income than actual and does not accurately depict inventory flow.When presenting inventory under GAAP(Generally Accepted Accounting Principles), we can utilize the FIFO or LIFO methods.
Companies have the flexibility to utilize both the LIFO and FIFO methods, depending on which one best suits their needs.
Intangibles ( Based in Researcher & Development)
- Research and development costs are capitalized under IFRS, while other costs are expensed.
- Both incurred research and development costs were to be immediately expensed under US GAAP.
What does mean that rule based & principles based ?
- The IFRS principles, which offer greater objective clarity, flexibility, and support professional judgment,
- U.S. GAAP serves as an example of rules-based accounting, which offers precision and clarity. Comprehending these distinctions is crucial inside the financial sector.
Revenue recognition
The foundation of IFRS is the idea that value is supplied at the time of revenue recognition. It divides all revenue-generating transactions into four groups: the selling of commodities, contracts for building projects, rendering services, and using the resources of another company. Businesses that implement IFRS accounting standards recognize revenues in two ways:
- Determine the cost that can be recovered during the reporting period and record it as revenue.
- Revenue recognition for contracts is determined by the percentage of the contract that has been executed, the expected total cost, and the contract value. The percentage of finished work should be reflected in the amount of revenue recognized.
Using GAAP
- The latter contains particular guidelines on how income is recognized across various industries, and it begins by establishing whether revenue has been generated or realized.
- The fundamental idea is that income isn’t recorded until the transaction of goods or services is finalized. Following the exchange of goods and the recognition and recording of the transaction, the accountant has to take the particular regulations of the business’s industry into account.
Liability Classification
- Depending on how long the company has been given to pay back its debts, liabilities are categorized as either current or non-current when financial statements are prepared using GAAP accounting standards.
- On the other hand, short-term and long-term liabilities are combined since IFRS lacks a clear separation between them.
The impact of IFRS and GAAP on financial statements
Under Balance Sheet
- Whereas IFRS presents assets in ascending order (i.e., non-current assets before current assets), US GAAP lists assets in decreasing order (i.e., current assets before non-current assets).
- According to US GAAP, fixed assets must be valued at their original cost; depreciation and impairments may cause their value to drop, but they are not permitted to rise. (LINE-WISE METHOD).
- Companies can choose to treat fixed assets according to their fair value under IFRS, which means that their reported value may change in line with changes in their fair value. (DETAILED VALUE METHOD).
Change in the Equity of Shareholder
Whereas IFRS mandates that changes in shareholders’ equity be reported as a separate statement, US GAAP permits the changes in shareholders’ equity to be disclosed in the notes to the financial statements.
IFRS 16: How does it affect the Financial Statements?
The biggest effect of IFRS 16 will be an increase in the total amount of debt that businesses declare on their balance sheets. The reason for this is that all leases—including operational leases—will henceforth be viewed as obligations. A company’s credit rating and capacity to raise financing may suffer as a result.
Is IFRS impacting Financial Performance?
Since the introduction of IFRS Accounting Standards more than 20 years ago, IFRS 18 represents the most significant shift to the way organizations communicate their financial performance. Investors will receive more accurate data regarding the financial performance of the companies as well as reliable starting points for their study.
Cash and Accrual Accounting
- The accrual technique displays revenue and expenses in real time, rather than at the time the payment is received.
- The accrual method’s “allowance for doubt full accounts” element
- When payments are physically received or disbursed, revenue and expense transactions are recorded using the cash accounting technique. Only small enterprises with low transaction volumes are eligible to use this strategy.