INTERNATIONAL ACCOUNTING STANDARDS

GAAP vs. IFRS

Why do we need accounting standards?

Over the years, accounting standards have been

developed by different accounting authorities.

These standards set the rules to be followed in the
practice of accountancy.
The ultimate purpose of these standards is to establish a
common set of procedures and rules in preparing
financial statements, thereby preventing
misunderstandings between and among the preparers
and users of accounting information.

Accounting Standards
The two most influential bodies setting accounting

standards are the Financial Accounting Standards Board

(FASB) in the United States, and the International
Accounting Standards Board (IASB) based in London,
England.
Many countries have their own accounting systems,

although most conform to one main system or the other.

Accounting standards vary in different countries;
however, there is a current move towards worldwide
adoption of the International Financial Reporting
Standards (IFRS).

Introduction to GAAP
The rules and standards established by the Financial

Accounting Standards Board (FASB) in the United States is

called GAAP Generally Accepted Accounting Principles.
It includes the standards, conventions, and rules accountants
follow in recording and preparing financial statements.
GAAP is not a single accounting rule, but rather an aggregate
of many rules.
Like many other common law countries, the US government
does not directly set accounting standards by statute.
However, the U.S. Securities and Exchange Commission (SEC)
requires that US GAAP be followed in financial reporting by
publicly traded companies.

Introduction to GAAP
GAAP vary in different locations. For example, U.S.

GAAP is only applicable and is the acceptable set of

accounting standards in the United States.
Canada has its own GAAP; Australia has its own.
Every country has its own set of accepted accounting
standards.

Introduction to IFRS

International Financial Reporting Standards or IFRS are

published by the International Accounting Standards

Board (IASB), an independent standard-setting
organization based in London.

IASB was formerly known as the International

Accounting Standards Council (IASC) which had
developed International Accounting Standards (IAS)
during its existence.

The IASB has adopted many of the IAS and retained their
names. New standards are published as IFRS.

As of now there are 41 standards: IAS 1, 2, 7, 8, 10, 11, 12,

16 to 21, 23, 24, 26, 27, 28, 29, 32, 33, 34, 36 to 41, and
IFRS 1 to 13.

Introduction to IFRS
IAS 3, 4, 5, and the other missing IAS have been fully

withdrawn and superseded by the latest standards.

For example: IAS 3 on Consolidated Financial
Statements is now under IAS 27 and 28; IAS 4
Depreciation Accounting is now under IAS 36; IAS
22 Business Combinations has been replaced by
IFRS 3, etc.

Introduction to IFRS
IFRS have been adopted by many countries, like

many in Europe, but off course with country specific

variations.
Though GAAP is also widely used, there is a current
move to shift towards International Financial
Accounting Standards (IFRS).

Accounting Standards in Bangladesh

Accounting standards in Bangladesh (BAS & BFRS)

are set by the ICAB - Institute of Chartered

Accountants of Bangladesh, which has mainly
adopted International Financial Reporting
Standards.
As of 2013, ICAB has adopted the IFRS as issued by
the IASB, except for IAS 39.
All foreign and domestic companies listed on the
DSE and/or the CSE are required to use IFRS.

Departure from Standards

In case of departure from the standards the member

must disclose, if practical, the reasons why

compliance with the accounting principle would
result in a misleading financial statement.
The departures are rare, and usually take place when
there is new legislation, the evolution of new forms
of business transactions, an unusual degree of
materiality, or the existence of conflicting industry
practices.

Major Differences between GAAP and IFRS

IFRS are considered more principles-based and U.S.

GAAP are considered more rules based.

However, there are certainly many specific rules
included in IFRS as well (and some observers think
they are trending in the rules-based direction).
Principles-based systems offer broader guidelines in
accounting treatment, within which accountants
exercise their best judgment; rules-based systems
are more prescriptive and specific.

Major Differences between GAAP and IFRS

Though mainly following the same philosophy, some major differences between IFRS and U.S. GAAP are:
Issue
IFRS
U.S. GAAP
Balance Sheer
Income statement
Documents included in the financial
Changes in equity
statements
Cash flow statement
Footnotes

Balance sheet
Deferred taxes

Balance sheet
Income statement
Statement of comprehensive income*
Changes in equity
Cash flow statement
Footnotes

Requires separation of current

Recommends separation of current
and noncurrent assets and
and noncurrent assets and liabilities
liabilities
Shown as separate line items on
Included with assets and liabilities
the balance sheet

Minority interests (usually

Included in equity as a separate
ownership positions by significant
line item
but not majority investors)

Included in liabilities as a separate

line item

Extraordinary items (events that

dont occur on a regular basis)

Prohibited

Allowed if theyre unusual and

infrequent

Bank overdrafts

May be included in cash if used

in cash management

Charged as a financing activity

Major Differences between GAAP and IFRS More Issues

Intangibles: Assets such as trademarks, Internet domain names, licensing

agreements, and other non-physical valuables with a useful life greater than a year
are recognized at fair value under GAAP. However, under IFRS, intangible assets
are recognized only if they are reliable, and will have future economic value for the
company.
Inventory Reversal Write-Down: Inventory is written down when its cost
becomes higher than its net realizable value, but when economic circumstances
change, causing an increase in the value, the amount of the write-down is reversed
in future periods. This is allowed under IFRS, but is prohibited under GAAP.
Definition of Asset: GAAP defines an asset as a future economic benefit,
whereas IFRS defines it as a resource from which future economic benefits will
flow to the firm.
Revenue Recognition: GAAP is very specific about not only what can be
considered revenue, but also how it should be measured, and how timing affects
its recognition. With IFRS, the method of measurement and timing the revenue
recognition is not specific, and there is no industry-specific guidance.

Major Differences between GAAP and IFRS More Issues Cont.

Statement of Income Under IFRS, extraordinary items are not segregated

in the income statement. With GAAP, they are shown below the net income.
Inventory Under IFRS, LIFO cannot be used, but GAAP, companies have
the choice between LIFO and FIFO.
Earning-per-Share* Under IFRS, the earning-per-share calculation does
not average the individual interim period calculations, whereas under GAAP
the computation averages the individual interim period incremental shares.
Development costs These costs can be capitalized under IFRS if certain
criteria are met, while it is considered as "expenses" under U.S. GAAP.
For more detailed comparisons from each subject area, please check:
http://www.iasplus.com/en-us/standards/ifrs-usgaap

Major Differences between GAAP and IFRS

Few of these differences are likely to cause major

changes in any companys reported results

A company with great results under GAAP wont
look terrible under IFRS, unless it got those results
with an extraordinary item, which is an event that
doesnt occur on a regular basis such as a merger or a
corporate restructuring.
Since extraordinary items are disclosed, someone
looking at the financial statements would be able to
make the adjustment easily.

GAAP Four Basic Assumptions

Accounting Entity: assumes that the business is separate from its

owners or other businesses. Revenue and expense should be kept

separate from personal expenses.
Going Concern: assumes that the business will be in operation
indefinitely. This validates the methods of asset capitalization,
depreciation, and amortization. In cases when liquidation is certain, this
assumption is not applicable. The business will continue to exist in the
unforeseeable future.
Monetary Unit Principle: assumes a stable currency is going to be
the unit of record. The FASB accepts the nominal value of the US Dollar
as the monetary unit of record unadjusted for inflation. This is also
know at the stable dollar principle.
Time-period Principle: implies that the economic activities of an
enterprise can be divided into artificial time periods.

Four Basic Principles

Historical Cost Principle: requires companies to account and report based on acquisition

costs rather than fair market value for most assets and liabilities.
Revenue Recognition Principle: requires companies to record when revenue is (1)
realized or realizable and (2) earned, not when cash is received. Also, under this principle a
company should establish an allowance for bad debt account. This way of accounting is called
accrual based accounting.
Matching Principle: Expenses have to be matched with revenues as long as it is reasonable
to do so. Expenses are recognized not when the work is performed, or when a product is
produced, but when the work or the product actually makes its contribution to revenue. Only
if no connection with revenue can be established, cost may be charged as expenses to the
current period (e.g. office salaries and other administrative expenses).
Full Disclosure Principle: Amount and kinds of information disclosed should be decided
based on trade-off analysis as a larger amount of information costs more to prepare and use.
Information disclosed should be enough to make a judgment while keeping costs reasonable.
Information is presented in the main body of financial statements, in the notes or as
supplementary information.

Five Basic Constraints

Objectivity principle: the company financial statements

provided by the accountants should be based on objective evidence.

Materiality principle: the significance of an item should be
considered when it is reported.
Consistency principle: the company uses the same accounting
principles and methods from year to year.
Conservatism principle: when choosing between two solutions,
the one that will be least likely to overstate assets and income
should be picked.
Cost-Benefit Relationship: the company considers the costs
necessary to prepare the information and what benefit users will
get from it.