Question

Which overall type of accounting standard do you prefer; GAAP or IFRS, and why? (300 words minimum)

Answer 1

I would prefer GAAP over IFRS.

GAAP are the generally accepted accounting principles, they are the standard set by the different regions like US GAAP is set the Securities and Exchange Commission(SEC) in US whereas Indian GAAP are set by the Institute of Chartered Accountants of India (ICAI). There will always remain some differences in their standards which need to be adjusted in order to be compared globally. GAAP is more of Rule based.It has industry specific rules which need to be followed accordingly.

IFRS Stands for International Financial Reporting Standards. These are standards set by the International Accounting Standard Board (IASB). It is principle based standard and is used globally. By being principle based, IFRS understands the economy of the transaction better than GAAP. It requires more use of judgement and interpretation before any standard is applied in a given situation.

Let us explain further by taking an example of the inventory valuation method. GAAP and IFRS both follows FIFO, weighted average and specific identification method for inventory valuation. However GAAP also allows LIFO method of inventory valuation. Showing inventory at higher cost results in artificially low income and does not represent the actual cash flow of the company.

Another difference that impacts the economy of a transaction is fair value revaluations. IFRS allows revaluation of inventories, property plant and equipment,intangible assets and investments in marketable securities according to their value.The valuation can be done upwards as well as downward. However GAAP only allows revaluation of investments in marketable securities.

Another difference is of accounting for intangible assets. Internal cost thar are required to  create tangible assets such as development cost are capitalized under IFRS when certain criteria are met.These criteria include consideration of the future economic benefits. Under GAAP development costs are shown as expense as incurred with the exception of internally developed software. For software that would be available for sale in the market, costs are capitalized once technological feasibility has been demonstrated. IFRS do not have specific guidance for software.

The point of IFRS is to maintain stability and transparency throughout the financial world. It allows to see what is exactly happening with the company and helps investors to take informed and calculated decisions.