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: Analysis and Income Statement Presentation


GAAP vs. IFRS: Analysis and Income Statement Presentation

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Alright, let's discuss some of the differences between gap and differs when it comes to financial statement analysis and the preparation of the income statement. So remember gap. These are the rules here in the USa right? You guys know this by now Financial Accounting Standards Board. The faz be they're the ones creating gap here in the usa the rules we focused on throughout this course and internationally. We've got the International Accounting Standards Board creating ciphers, the international financial reporting standards. Okay, so let's go ahead and wrap up these differences between gap and differs in our analysis section. So we're gonna see some similarities here. And this is the tools of financial analysis that we've learned here. We had horizontal analysis, vertical analysis and we learned a whole bunch of ratios throughout this course. Right? Well those ratios are global. Global, they don't particularly mean they're not gap that creates these ratios or offers. This is tools of financial analysis that don't really matter for the accounting rules themselves. Were using that information to analyze the the financial statements. So those tools are the same across the across the globe. Now, some of the specific rules the way we deal with operating and unusual items. So remember we've got operating our day to day activities and then unusual items, things that don't happen every day. Those could be unusual losses or it could even be things like um you know, when we sell a piece of our equipment in the factory, that's not, stuff we do every day. What we're gonna have the same basic treatment for those for those transactions. We talked about discontinued operations. So this is when we're gonna stop doing some portion of our business, right? Maybe we're a company that makes all sorts of food and we're gonna stop making cereal. Well, we're gonna have to account for that serial business separately. And we're gonna show it separately on our income statement. And we're gonna do those same rules for gap and offers the way we present it. We're gonna always show our discontinued operations separately from our core operations that are continuing. Okay. So when we talk about a change in accounting principle, this could be where we're changing from, say the weighted average method for accounting for inventory. And we're changing to the Fife Oh method. Well, when we do that, we need to retroactively restate information we've previously put out. We want to show as if we've always used the FIFA method so that all the information we're showing the multiple years of balance sheets and income statements. Well, it should show a comparable uh comparable results for inventory. So we want to retroactively restate it and that's a change in accounting principle. Whereas with a change in accounting estimate. So we've got the principal and the estimate. So an estimate. We might have made maybe the estimated useful life of a machine. Well, this is an estimate. We made our best guess at the time that we purchased the machine and then we're going to update that information when we have better information. So we don't have to go back in time for those, we're just gonna deal with those prospectively into the future. Okay. And those rules are the same for Gap and ifor's Okay. Retroactive for a change in principle prospected for a change in estimate. And lastly the reporting of comprehensive income. Remember comprehensive income. This is pretty much beyond the scope of this class. But I like to think of it as the comprehensive income is just net income. Like we learn on our income statement plus some stuff right? And this this stuff is like abstract concepts, some higher level accounting stuff like the revaluation of assets dealing with unrealized gains and losses, things like that, that are beyond the scope of this course for the most part. Okay. So we in both cases we're dealing with this comprehensive income gap and lifers and hooray we get to the differences and we say there's no significant differences when we're dealing with our analysis and our presentation of our income statement. So we're done here. We're done with our Gap in our lifers. Remember one of the biggest differences we saw between gap and differs was the revaluation of our long term assets. Okay. And we've talked about that in previous gap and differs videos and that's one of the key differences between gap and differs if I was gonna say three things to remember about Gap and heifers, the first would be that gap is more strict in that it has a more rules based approach where they tell you more strictly what you need to do, where refers is more principles based and gives the account in a little more leeway in their judgment. The second one I'd say to remember is the revaluation that allows you to revalue your long term assets. And the third one, what was the third one? I just had it in my head. Oh man! The third one. Ah yes, I remember now I had a moment of of laps but I remember now is that offers does not allow the use of life? Oh, last in first out when it comes to inventory valuation, Ifor's does not allow life. Oh okay. So those are the three main differences that I would like you to remember and that's about it. When it comes to Gap versus Ifor's here. Let's go ahead and move on to our next video.