Tag Archives | IFRS

What is GAAP?

What is GAAP?

GAAP stands for Generally Accepted Accounting Principles. It is the set of rules and guidelines for U.S. companies to follow. GAAP regulates financial reporting for public companies, private businesses, non-profits, and government authorities. This means that GAAP outlines the procedures to make sure that businesses are recording their financials in the same way.

GAAP Principles

The principles in GAAP ensure transparency and consistency. This includes the following topics:

The overall philosophy behind these principles is to prevent deceptive recording.

What is IRFS?

While the United States follows the GAAP, most of the developed world follows the International Financial Reporting Standards (IFRS.) In 2008, the United States decided to move towards adopting the IFRS to be more consistent with the rest of the world. While the long term effects are only speculative, the short term changes will have an immediate impact on accountants, managers, and investors.

IFRS vs GAAP

What is the benefit of following the same set of guidelines as the rest of the world? One major advantage of having the same international financial reporting guidelines is the effect on investors. Investors will be able to compare and contrast investments between nations more accurately.

For example, if there is one startup in the United States and one in London, then they will likely use different methods for financial reporting. This could make the investor’s decision very difficult. If inventory and depreciation are valued differently, then the investor might not fully understand the true standing of these startups.

What is GAAP

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International Financial Reporting Standards (IFRS)

See Also:
Financial Instruments
Finance Beta Definition
Generally Accepted Accounting Principles (GAAP)
Financial Accounting Standards Board (FASB)
Financial Ratios

International Financial Reporting Standards (IFRS)

The International Financial Reporting Standards (IFRS) are a set of rules and standards for preparing financial statements. An organization called the International Accounting Standards Board (IASB) issued the IFRS.

The goal of the IFRS is to standardize the regulations and procedures for financial statement preparation around the world. Currently, many countries have their own sets of standards for accounting rules and regulations for financial statement preparation. Furthermore, across the globe, many countries are beginning to conform to the IFRS.

IFRS standards apply to financial statements such as the balance sheet, the income statement, the statement of cash flows, a statement of owner’s equity, and accompanying notes to financial statements. Furthermore, the IFRS cover such things as underlying assumptions and qualitative characteristics of financial statement preparation. The IFRS also covers the basic elements of financial statements – assets, liabilities, equity, income, expenses – and the proper way to recognize these elements.

IAS – IFRS

The IFRS were established in 2001. Prior to that date (from 1973 to 2001), the International Accounting Standards (IAS) were the set of rules and regulations recognized worldwide. Then the IAS was incorporated into the IFRS.

International Accounting Standards Board (IASB)

If you want more information regarding IASB and IFRS, then go to: iasb.org

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International Financial Reporting Standards

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International Financial Reporting Standards

Further reading

Original texts of IAS/IFRS, SIC and IFRIC adopted by the Commission of the European Communities and published in Official Journal of the European Union http://ec.europa.eu/internal_market/accounting/ias_en.htm#adopted-commission

International Accounting Standards Board (2007): International Financial Reporting Standards 2007 (including International Accounting Standards (IAS(tm)) and Interpretations as at 1 January 2007), LexisNexis, ISBN 1-4224-1813-8

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Amortization

In accounting, amortization refers to the periodic expensing of the value of an intangible asset. Similar to depreciation of tangible assets, intangible assets are typically expensed over the course of the asset’s useful life. It represents reduction in value of the intangible asset due to usage or obsolescence. Basically, intangible assets decrease in value over time, and amortization is the method of accounting for that decrease in value over the course of the asset’s useful life. A company’s long-term capital expenditures can also be amortized over time.

Amortization Treatment

Intangible assets are recorded on the balance sheet. But over time, as you amortize these assets, the amortized amount accumulates in a contra-asset account. Therefore, it diminishes the net value of the intangible assets. The periodic amortization amounts are expensed on the income statement as incurred. Whereas on the cash flow statement, these expenses are added back to net income in the operating section. This is because they represent non-cash expenses.

Intangible Asset Amortization

Examples of intangible assets that a company may amortize include the following:

Depending on the circumstances, some brand names or goodwill items may not decrease in value over time. Therefore, you may not amortize them.

Regulations

In International Financial Reporting Standards (IFRS), the rules and standards for intangible asset amortization are described in International Accounting Standard 38: Intangible Assets. In the United States, according to General Accepted Accounting Principles (GAAP), the rules and standards for intangible asset amortization are described in Statement of Financial Accounting Standards No. 142: Goodwill and Other Intangible Assets.

Amortization of Loans

Amortizing a loan consists of spreading out the principal and interest payments over the life of the loan. Spread out the amortized loan and pay it down based on an amortization schedule or table. There are different types of this schedule, such as straight line, declining balance, annuity, and increasing balance amortization tables. Amortizing mortgages is common.

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amortization

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amortization

See Also:
Straight-Line Depreciation
Accelerated Method of Depreciation
Double Declining Method of Depreciation
Goodwill Accounting Term

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Accounting Principles 1, 2, and 3

See Also:
Accounting Principles 5, 6, and 7
Continuous Accounting: The New Age of Accounting

Accounting Principles 1, 2, and 3

Basic accounting principles are generally held and regulated under Generally Accepted Accounting Principles (GAAP). The Financial Accounting Standards Board (FASB) also provides rulings and general practices with regard to these accounting principles. Some of these principles of accounting also contain underlying concepts or methods that may be used as it pertains to that company’s particular industry or business venture. Accounting Principles 1, 2, and 3 include the following:

  • Reliability Principle
  • Comparability Principle
  • Cost Principle

Reliability Principle

Also known as the Objectivity Principle, this basic accounting principle requires that all companies provide accounting information that is without significant error or bias. The reliability principle is generally required for publicly traded corporations under the Securities Exchange Act of 1934.

Comparability Principle

The comparability principle is based off the idea that information is much more useful if the firm establishes a certain standard or benchmark and it’s general competition. There are generally two guidelines that firms should follow when using the comparability principle:

1) The first of these is the requirement that accounting information remain comparable from business to business. This is generally performed when companies register with different exchanges. Different exchanges generally have accounting concepts and principles like an accounting concept such as the Stable-Monetary Unit or basic accounting principles such as GAAP or IFRS so information is easily read and readily comparable to other companies in the market.

2) The second part is the requirement that any single businesses’ statements or reports be comparable from one period to the next. Generally speaking when a company adopts a certain method or a principle of accounting, it must remain with that accounting basic from quarter to quarter and year to year.

Cost Principle

The Cost Principle generally states to record assets and services at their purchase or historical cost. This is one accounting concept principle that allows for more conservative valuations under the concept of conservatism. This also provides more meaningful statements. There is not a requirement for accountants to mark all assets to the market.

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Reliability Principle, Cost Principle, accounting principles 1, 2, and 3

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accounting principles 1, 2, and 3, Cost Principle, Reliability Principle

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Compare IFRS vs US GAAP for SME’s

Do you want to know what is going to change when the new international standards are adopted? The AICPA has now created a wiki comparing the streamlined and complete version of the international standards using IFRS vs US GAAP for SME’s (Small and Medium Sized Entities). All of the sections of the IFRS will be updated in a wiki format on a go forward basis.

Compare IFRS vs US GAAP for SME’s

You can now see how the new rules will apply to private companies. As the rules become evident and adoption more likely, this site will be a great resource for navigating change. To see the comparison, go to the following site: wiki.ifrs.com.

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direct cost vs indirect cost

IFRS vs US GAAP

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