Accounting Standards: GAAP & IFRS

In the world of accounting, many places must abide by IFRS, international financial reporting standards; or if you live in the United States, it’s GAAP, generally accepted accounting principles.The key difference between GAAP and IFRS is that GAAP are rule based whereas IFRS are principle based. Either way, they have their differences and are important to learn!

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GAAP (Generally Accepted Accounting Principles)

GAAP doesn’t have a set creation date as it developed over time and is consistently evolving. After the Great Depression, the U.S created the United States Securities and Exchange Commission (SEC). SEC is most often regarded as the beginning of GAAP as they pushed for standards through the American Institute of Certified Public Accountants (AICPA). In 1959, after some failed problem-to-problem based attempts to set standards, the AICPA created the Accounting Principles Board (APB) and that held 31 opinions (think of this kind of like rules) until 1973, when it was replaced with the Financial Accounting Standards Board. This board was created by the Financial Accounting Foundation alongside the Financial Accounting Standards Advisory Council. FASB really started to mold the GAAP; and with the FASB, AICPA also created the Accounting Standards Executive Committee (ArSEC) which then also led to the creation of the Emerging Issues Task Force (EITF).  By 2008, the FASB reorganized thousands of U.S. GAAP pronouncements into roughly 90 accounting topics with the FASB Accounting Standards Codification. This codification also created structure for relevant guidance in the SEC. As noted earlier, GAAP never got a definite make time, but largely developed through various structures as time went on. With the history out of the way, it’s time to discover what GAAP currently stands for.

As mentioned in the beginning, GAAP is only used in the U.S. GAAP’s rules fall under what we call the 10 principles, 4 assumptions, and 4 Constraints. Below are two infographics that outline the 10 principles and the 4 constraints.

With those down, it’s time to cover the four assumptions:

• Economic Entity

  • Assumes that business and personal transactions do not mix.

• Going Concern

  • Assumes that business will continue to remain in business for the foreseeable future. 

• Monetary Unit/Measurement

  • Assumes money is to be the main use in said business and that the business will record all transactions with money.

• Periodicity/Time Period

  • Assumes all reporting is done on a regular basis & is done so consistently.

Although GAAP is ever-changing, it’s still vital to understand. Outside of the US, it’s time to take a look at the IFRS!

IFRS (International Financial Reporting Standards)

The IFRS history starts in 1973 with the International Accounting Standards Committee (IASC). The IASC at that time was made up of accounting bodies from ten different countries. Together they created the International Accounting Standards (IAS). In 2001, the International Accounting Standards Board (IASB) took over the IASC - updating the IAS and then creating Standing Interpretations Committee standards (SICs). A year later, SIC was replaced by the International Financial Reporting Interpretations Committee (IFRIC).Today, IFRS are decided by the IASB and the IFRS Foundation. You can check out the IFRS Foundation’s website here, to learn more about who’s in charge and how the Foundation works and operates. Additionally, in 2021, the IFRS Foundation formed the International Sustainability Standards Board (ISSB).

Even though GAAP is only used in the U.S, over 150 different places across the globe use the IFRS. As the IFRS is more principle based, its ‘playbook’ is a lot more extensive as it leaves more interpretation so it has to be detailed. The IFRS are composed of five different parts: 

1. Conceptual Framework for Financial Reporting

   1. This is what the IASB uses as a helpful guide for creating new standards. It is composed of eight different chapters that outline what defines what are financial statements, what’s in them, and appropriate communication in reporting financial statements. For an easy breakdown of each chapter, check out this link.

2. IFRS Accounting Standards

   1. This is (currently) composed of 19 different parts. These parts are essentially the rules of the IFRS. They are similar to the Conceptual Framework as they outline how financials are to be recognized, presented, and measured.

3. IAS Standards

   1. This is, basically, a legacy issue of the old IFRS from when the IASC was in charge of IFRS. Although the IAS standards were created by the IAS (and as said earlier, replaced by the IASB), these standards still hold value and remain important to IFRS.

4. IFRIC Interpretations 

   1. The IFRIC works with IASB in answering questions that arise in the application of the IFRS. There are 23 different interpretations.

5. SIC Interpretations 

   1. Similarly to the IAS Standards, SIC Interpretations are old interpretations before the IFRIC replaced SIC. Although there were a total of 33 SIC interpretations, only five are used now.

The IFRS are always adapting and changing to meet the current needs of accounting. This means that the IFRS listed here may change as time goes on. Here you can find the detailed list of all parts of the IFRS as provided by the IFRS Foundation if you are interested in learning more! Additionally, check out this link for a breakdown of parts 2-5 above!

Now We Know All the Standards!

As seen with having both GAAP and IFRS, there remains no united accounting standards across the globe. Regardless, it’s important to understand the regulations of each and abide by them if you’re an accountant!