Gaap Vs. Ifrs

Final Project

Milestone 1: GAAP vs. IFRS

Southern New Hampshire University

GAAP Versus IFRS

GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards) are two different standards that report accounting information. GAAP is used in the U.S., while IFRS is used in over 110 countries around the world. GAAP is considered a more “rules-based” system of accounting, while IFRS is more “principles-based.” (Forgeas, 2008) Both of these standards are reporting accounting information to stakeholders in order to comply with accounting standards, but they have a different methodology to assess accounting treatment.

While U.S. companies use GAAP and do not directly use IFRS, IFRS also impacts them. For instance, in cases of global mergers and acquisitions, when investors, customers or vendors are non-US stakeholders and they would like to understand more about business performance. Switching from GAAP to IFRS has both advantages and disadvantages. Some benefits are helping companies, investors, and the public globally easily compare financial statements and to raise capital through foreign nations. Some disadvantages are the costs of transitioning may outweigh the benefits. (Yoon,2009)

In order to transition from GAAP to IFRS, the differences have impacts influence in representing the company’s performance. GAAP requires documents in financial statements including the balance sheet, income statement, changes in equity, statement of comprehensive income, cash flow statement, footnotes. IFRS requires the same documents as GAAP, but excluding a statement of comprehensive income.

In a GAAP balance sheet, current and non-current assets and liabilities are not required separated but in an IFRS balance sheet requires that. Under GAAP, the deferred taxes are included with assets and liabilities and minority interests show as a separate line item on the liabilities. While IFRS, the deferred taxed must be contained in the balance sheet as a separate line item and minority interest are included in equity.

One of the distinct differences is the method of recording the value of inventory. Under GAAP, companies can use LIFO (Last-In-First-Out), FIFO (First-In-First-Out), weighted average cost, but IFRS is not permitted LIFO (firm records the last unit purchased as the first units sold). Companies that use LIFO (Last-In-First-Out) must revalue inventory, which could result in lower gross profit and major tax liabilities. (Harris, Jermakowicz, Epstein, 2014)

Moreover, fixed assets are initially valued at cost in both GAAP and IFRS. After that, IFRS allows fixed assets to be adjusted to fair value and requires component depreciation when economic benefits differ from the primary asset. Whereas GAAP component depreciation is permitted but not required. PP&E (Property, Plant and Equipment) under GAAP are valued at historical cost, but IFRS allows evaluation of PP&E to fair value, so book values are likely to increase under IFRS. (GAAP vs. IFRS) Besides, the intangible assets (research and development costs and advertising costs) are expensed as incurred in GAAP, while in IFRS can be capitalized under certain conditions. (Lasker)

        In order to transition Amazon financial statements from GAAP to IFRS, I need to evaluate current systems, processes, and protocols that Amazon uses and finds the difference from IFRS. First, we need to rearrange criteria in financial statement follow IFRS. Then adjustment some data are missing and eliminating data are not required. For example, R&D and advertising and other promotion costs in Amazon are expensed as incurred, but in GAAP, they are allowed to capitalization (they will be deferred and amortized). PP&E assets are reported at cost less accumulated depreciation, and depreciation is recorded on a straight-line basis, while IFRS permits companies to use the revaluation model. Goodwill impairment, under GAAP, is determined at the level of a reporting unit, while IFRS is tested for impairment at the level of a cash-generating unit. For inventories, Amazon uses FIFO method that is allowed in IFRS. The same as PP&E and depreciation is use straight-line method that accepts from IFRS. (Harris, Jermakowicz, Epstein, 2014)