Skip to main content
Pearson+ LogoPearson+ Logo
Start typing, then use the up and down arrows to select an option from the list.

Financial Accounting

Learn the toughest concepts covered in your Financial Accounting class with step-by-step video tutorials and practice problems.

15. GAAP vs IFRS

GAAP vs. IFRS: Introduction


GAAP vs. IFRS: Introduction

Play a video:
Was this helpful?
So throughout our discussions we've been focused on gap. Generally accepted accounting principles which are the rules in the USA but like we've talked about there's international rules to lifers. So throughout this book, what we do is we compare the rules and gap with the rules and differs which for the most part are very similar but there are some key differences between them too. So let's go ahead and just introduce the differences between gap and offers now. So remember in the USA we've got generally accepted accounting principles and they're set by the Financial Accounting Standards Board. So the faz be F. A. S. B. Financial Accounting Standards board, they produce gap. Okay. And that's the rules that we follow in the US and that's what we're basically focused on throughout the class. But international standards, Well the international standards are the Ifor's international financial reporting standards and they're set by the International Accounting Standards Board a lot of letters there, a lot of words, but it's very easy to know which one's the international one because the International Accounting Standards board does the international financial reporting standards, Ifor's. We've got the i international International, we know we're talking about international with that one. Okay, so like I said, there's gonna be some key differences and similarities between the two. Now, for the most part, what's happening is that they're trying to converge a lot of these standards because they want to have one set of rules throughout the world and why would they need this kind of standard set of rules and it's happening more and more now that we need this kind of single global set of accounting standards. But the US, since it's basically a forerunner in the business world, what we have our own set of rules and for the most part, there are a lot more stringent than the the international rules. So let's see some of the more the reasons why this is becoming more and more relevant that we want to have a single set of standards. First, there's multinational, this is a huge, huge issue here, right? We've got companies that sell products throughout the world. Think about coca, cola, Mcdonald's Toyota, right? They have products throughout the world, they have restaurants set up in every different country and there's going to be different laws in every country and different ways to do accounting and different ways to do reporting. So this ask for the need for for a single set of standards, mergers and acquisitions. This is when companies joined together, there's business combinations. Well, if they're from different countries with different accounting standards that can complicate the accounting afterwards after they've merged. Right? And now information technology now with the internet, things are much more global. We have a lot more international trade happening. It's very seamless and efficient and it just lends itself to more of a international standard to be set. Finally the same thing with financial markets that they're becoming more global on a daily basis. Right? And we have global markets for stocks for bonds and currencies as well. Okay. So throughout each chapter, what we're gonna do is we're gonna have basically a little summary of the similarities and differences between Gap and lifers. Okay. And these are usually gonna be quick lessons uh just to kind of point out the differences. We don't, especially in your class, you don't really go into deep details about how how we account for things differently in ifor's it's better to just know the key differences. So let's go ahead and see some of the similarities and differences just in the fundamentals of accounting. So what we're gonna see is with gap and offers the basic techniques for recording um is gonna be the same. We're gonna still use a journal entry system which we'll talk about more as as we continue the course and a lot of what we do is very similar in that instance. We're still meeting the needs of the investors. Right? That's the whole goal of our financial reporting. We have the external users are are the are the main goal of our financial reporting is to meet the needs of these investors. These external users. Okay. And the way we organize our businesses in the U. S. And abroad, they're very similar as well. We're gonna have proprietorships which is just the sole owner partnerships and corporations very similar throughout the world. What we'll see these business organizations now, how about differences? So the difference one main difference is that I first tends to be a bit simpler with its requirements. So what I mean is that I first tends to be more principles based. We say its principles based where they kind of give you, you know, a set of standards and they're like, you know, here's here's what we think you should do. And then they give the accountant a little bit more leeway into making judgments on their own. Where Gap is more rules based in the US rules based. Okay. And another term we use for Gap is that there's bright line standards. What that means when we say bright line standards is that there is usually very specific numbers that are given in in standards that are set, maybe a very specific threshold. Like you know, if if this number is above 80%, well then you have to do it this way. If it's below 80% you do it that way. When I first it might not say 80%, it might kind of give you a terminology that could give you a little more judgment call of like maybe we account for it this way or account for it a different way. Right? So I first gives you a little more leeway or Gap is a bit more strict. Okay. And this is one of the key features of the differences between gap and differs. If you had to guess on a difference between a on a test and you have to guess which one was gap and which one was differs? Well it's most likely that the offers rule is going to be a little more judgmental where it gives the where it gives the accountant a little more freedom in how to do the accounting. Okay. Another main difference here is the Sarbanes Oxley act. Okay. They love to talk about the Sarbanes Oxley Act in your course and we're gonna have a video on that later in the course uh that that we'll talk about it here. So Sarbanes Oxley, this was a result of some accounting scandals that happened in the early two thousands in the US. So these are some laws that were put in place in the U. S. Not internationally that basically are more stringent upon public companies. So companies that are traded on stock exchanges? Well they have to follow some more strict guidelines on top of gap that um makes users more comfortable with the information that's being put out. Okay. And these strict guidelines are only for companies on U. S. Exchanges. So this applies more to companies following gap than companies following ifor's. Okay. So it's a little bit more rules that they have to follow and these are stringent guidelines for auditing and financial statement preparation. Okay so it puts more rules on the auditors of the financial statements as well as how we prepare the financial statements um to give to the users. Okay so what's the main thing I want to focus on in this video is the difference between Heifers and Gap. This is the most important part, right here. Okay. The principles based versus rules based approach of Lifers versus Gap. But what we're gonna see as we go throughout the book is that for the most part, a lot of the accounting is going to be similar and then we'll have specific issues where we're gonna have differences between the two. Alright, So with that said, let's go ahead and move on to the next video.