Comparing IFRS to GAAP
10 June 2015
The International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) are rules and guidelines established to attempt to standardize accounting and recording practices across the United States and Internationally. While United States has traditionally used GAAP, the ever changing world market makes it necessary for the US to begin to use IFRS in conjunction with or sometimes in place of GAAP.
In an effort to standardize fair value measurements for financial instruments, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) implemented a multistep approach to the standards. The
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For example, in a renovation project, each part of the project to be renovated (such as windows and doors, heating, siding, etc,) is allocated separately and then the cost is depreciated separately. IFRS requires “each component of an item of property, plant and equipment must be depreciated separately if its cost is significant in relation to the total cost of the item.” The process of adjusting up or down the assets value in relation to changes in the fair market value of an asset is called revaluation. Under IFRS, assets are required to be recorded at cost initially but can be accounted for later using the cost model or revaluation model. The cost model allows assets to be recorded at the historical cost, minus accumulated depreciation and accumulated impairment loss; if there is a change in the market, the value is not adjusted to account for the changes. In the revaluation model, the asset that was initially recorded at cost is increased to account for appreciation in value. Development costs are costs that may lead to new products, new patents, processes or patents. Future benefits are difficult to anticipate, and the timing is uncertain leading companies to record development costs as an expense when they are incurred regardless of the success of the project. Under IFRS, some development costs can be capitalized but it may lead to differences in development expenditures across nations. According to both GAAP and IFRS, in the research