All countries and government bodies follow specific accounting standards for all businesses. These accounting standards include guidelines, rules, and regulations, etc., for all the companies. These are followed as it is mandatory for companies to show their final financial report to government authorities. Two such accounting standards followed are IAS and GAAP.
IAS is a planned method to understand a company’s financial status, future scope, tax payment, income levels, etc., so that the company can be internationally compared to other companies of the same domain. Ever since the European Union (EU) started practicing IAS standards for their companies in 2005, IAS has been introduced to many countries making it a global method for accounting.
Although IAS has become the most preferred accounting method, some countries like the USA, Canada, UK, etc., are still an exception as they accept the GAAP method to handle their companies’ financial status.
What is GAAP?
GAAP stands for Generally Accepted Accounting Principles. GAAP standards were developed jointly by the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB). The idea of GAAP was initiated when legislation passed the Securities Act 1933 and the Securities Exchange Act of 1934. Since then, GAAP has undergone several reforms and gradual improvements to become the United States’ accounting method. It is regarded as one of the best financial practices by many companies in the country.
GAAP devises objectives and guidelines for accounting statements and financial reports. It is mandatory for US-based companies to follow GAAP to compile their statements. GAAP provides a strong framework for companies to report their accounting reports consistently every year. GAAP standards are rules-based, so the GAAP procedures for the banking domain are different than those for the manufacturing domain and are different, again, for all other businesses.
GAAP also practices full disclosure reporting which means that the inclusion of in-depth material in the financial reports, so that the investors know exactly what they are investing their resources into. This makes GAAP one of the most trusted accounting methods.
GAAP’s foundation is defined by 10 basic principles including Regularity, Consistency, Sincerity, Permanence of Methods, Non-compensation, Prudence, Continuity, Periodicity, Materiality, and Faith.
Main Differences Between IAS and GAAP
- IAS is a principle-based method of accounting while GAAP is rules-based.
- IAS has a much wider reach and is practiced globally whereas GAAP is majorly practiced by US-based companies.
- IAS uses the weighted-average method and the first-in-first-out method. On the other hand, GAAP uses the weighted-average method, and both the last-in-first-out and first-in-first-out method.
- IAS standards have a better future as compared to GAAP because IAS has been expanding throughout the world and countries are slowly shifting towards the international method.
- In IAS, intangible assets are valued based on future economical benefits whereas in GAAP, intangible assets are valued at a fair value.
Conclusion
Accounting methods like IAS and GAAP are very necessary for a country for a clear vision of financial status. Accounting not only provides the financial status of a company, but it also helps judge which companies are beneficial for the country’s overall finances from the private sector, the tax paid, the salary of employees, etc. Even though IAS is now called IFRS, the principles and previous IAS standards still apply. There is a total of 17 IFRS standards and 41 IAS standards which collectively apply as accounting standards.
On the other hand, GAAP is based mostly in the US. As a result, it has limited reach. Even though the standard of work at GAAP is exceptional, comparing the companies that IAS and GAAP manage can be unfair. Because both IAS and GAAP work under different rules and regulations, GAAP often struggles to compare its client companies internationally. Due to this factor, countries are slowly shifting towards International Account Standards for their companies.
Even though IAS and GAAP work separately, the purpose served is practically the same. Even though accounting standards are complex, they make financial earnings look a lot more detailed and understandable. Whether a country approves IAS or GAAP solely depends on the advantages one provides over the other.
References
- https://onlinelibrary.wiley.com/doi/abs/10.1111/1475-679X.00112