Differences between IFRS and GAAP
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Anmol Kaur
1) ‘While IFRS rules ban the use of last-in, first-out (LIFO) inventory accounting methods, GAAP rules allow for LIFO’ Explanation:
LIFO is a cost layering method used to value the cost of goods sold and ending inventory. LIFO is a contraction of the term “last in, first out,” and means that the goods last added to inventory are assumed to be the first goods removed from inventory for sale.
What else can be used in place of LIFO? Answer is FIFO:
FIFO is a contraction of the term “first in, first out,” and means that the goods first added to inventory are assumed to be the first goods removed from inventory for sale.Both systems (IFRS and GAAP) allow for the first-in, first-out method (FIFO).
Key accounting considerations while using LIFO (and may be why IFRS bans its use) :
If costs are increasing(in case of inflation) the last items sold are the most expensive, so your cost of goods sold increases, you report fewer profits, and hence pay a smaller amount of income taxes in the near term. On the other hand, if costs are decreasing, the last items sold are the least expensive, so your cost of goods sold decreases, you report more profits, and therefore pay a larger amount of income taxes.
2)’While IFRS allows inventory reversals under certain conditions, US GAAP doesnt allow it at all !’
Explanation:
Both systems ( IFRS and GAAP ) require that the inventory be written down (reduced in value in books of accounting ) as soon as its cost is higher than its net realizable value.
Net realizable value (NRV) is the value of an asset that can be realized upon the sale of the asset, less a reasonable estimate of the costs associated with the eventual sale or disposal of the asset in question.
Sometimes the net realizable value changes and it may happen that the inventory assets have appreciated in value. The IFRS allows for reversals to be made in earlier write downs and subsequent increases in value to be recognized in financial statements. These reversals must be recognized in the period in which they occur and are limited to the amount of the original write-down.
In contrast, GAAP prohibits reversals altogether.
So, if I wrote down $3 {suppose my inventory was worth 10 and now 7} of inventory I can only revalue up to 3 USD {even though my inventory is valued at 15}) if my financial statements are produced based on IFRS and this cannot be done in case of GAAP.
Background:
In US , financial reporting and accounting practices are set forth by Financial Accounting Standards Board (FASB). These are based on GAAP (You can read what GAAP and IFRS are in my earlier posts) while IFRS are set of international #accounting standards established by International Accounting Standards Board to have a common global accounting language.
As of March 2018, more than 180 countries have adopted IFRS which is standard in European Union and many countries in Asia, South America. This has benefitted them in international business and investments while the US Securities and Exchange Commisision has openly expressed desire to bring down differences between GAAP and IFRS but have refrained from adopting IFRS as a whole and such a development to write down differences has been slow.
dhruvkashyap
Good post. There are also major differences b/w IFRS and US GAAP relating to valuation of investments, other Long-term assets and also on the liabilities side. Hope we’ll discuss them in nearby future.
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