3: GAAP/IFRS frameworks

GAAP/IFRS Frameworks: The Rulebook for Financial Reporting

Financial statements are the universal language of business. To ensure this language is consistent, reliable, and comparable across different companies and countries, standardized frameworks are essential. The two dominant frameworks globally are Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). Understanding their core principles, differences, and governing bodies is fundamental for any accounting student.

GAAP: The US Standard

• Governing Body: Primarily established and maintained by the Financial Accounting Standards Board (FASB) in the United States. The Securities and Exchange Commission (SEC) has the legal authority to set standards for public companies but largely delegates this to the FASB.
• Jurisdiction: Predominantly used within the United States. Publicly traded US companies must adhere to US GAAP.
• Philosophy: GAAP is often characterized as more "rules-based." It provides specific, detailed guidance and bright-line tests for numerous accounting scenarios. This aims to reduce interpretation differences and enhance comparability among US companies, but can sometimes lead to complexity.

IFRS: The Global Aspirant

• Governing Body: Developed and issued by the International Accounting Standards Board (IASB), based in London.
• Jurisdiction: Used in over 140 jurisdictions worldwide, including the European Union, the UK, Canada, Australia, Japan, and many emerging economies. The US currently does not require IFRS for domestic public companies.
• Philosophy: IFRS is generally considered more "principles-based." It focuses on establishing broad principles and objectives, requiring professional judgment to apply them to specific transactions. This aims for conceptual accuracy and adaptability but can lead to more variation in application.

Key Differences in Approach
The rule-based vs. principles-based distinction manifests in practical differences:

1. Inventory Costing: GAAP permits Last-In, First-Out (LIFO); IFRS prohibits LIFO.
2. Development Costs: GAAP typically expenses research and development costs as incurred; IFRS allows capitalization of development costs meeting specific criteria.
3. Revaluation of Assets: GAAP generally requires historical cost for property, plant, and equipment (PP&E); IFRS allows (but doesn't require) revaluation of PP&E and intangible assets to fair value.
4. Impairment Reversals: Under GAAP, once an asset impairment loss is recognized, it generally cannot be reversed if conditions improve. IFRS allows reversal of impairment losses for certain assets (excluding goodwill).

Convergence Efforts
Recognizing the inefficiencies of multiple frameworks, the FASB and IASB undertook a major convergence project in the early 2000s aiming to reduce key differences. While this led to significant alignment in areas like revenue recognition and leasing, full convergence was not achieved. Both frameworks continue to evolve, sometimes collaboratively, sometimes independently. The long-term trend is towards greater global adoption of IFRS, though US adoption remains uncertain.