Introduction
The 2018 video production “The Difference Between GAAP and IFRS” updated individuals on the differences between the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) (WolvesAndFinance, 2018). This evolution reflects how the environment of world trade changes, and how accounting standards must keep up with changed circumstances.
Revenue Recognition
In the period after 2018, revenue recognition standards have been substantially harmonized. Both GAAP and IFRS adopted a consistent standard for revenue recognition, ASC 606 and IFRS 15. The two sets of rules take as their objective ensuring that financial statements can be compared freely and profitably (WolvesAndFinance, 2018). They seek to ensure that companies recognize revenue in a consistent manner, according to the transfer of control to the customer.
Leases
Besides, Leases are another area where accounting standards have evolved. Both GAAP (ASC-842) and IFRS 16 currently require lessees to recognize lease liabilities and related right-of-use assets on the balance sheet (Horngren et al., 2014). The purpose of this change is to provide a more faithful picture of a business position than before and to improve comparability between enterprises owning and leasing assets.
Credit Losses
Credit loss provisioning has been updated significantly since 2018. According to GAAP, this model currently follows the Current Expected Credit Loss (CECL). It is based on IFRS but that model has gone the way of the Expected Credit Loss (ECL). In either case, entities need to recognize the expected credit losses in financial instruments upfront, adopting a forward-looking strategy for setting aside provisions.
Goodwill Impairment
Goodwill impairment under GAAP and IFRS is tested and recognized through different methods. The former has “two steps” while the latter works with a single “step.” This lead to timing and amount differences in impairment recognized, thus it affects financial statements and comparability among entities operating otherwise under different frameworks ((Horngren et al., 2014).
Analysis of Differences
There are several factors that promoted divergence between GAAP and IFRS is long. However, the economic and legal variety in these standards is also an important consideration. While roasted in the U.S legal system, GAAP has unique attributes of American business culture; adaptability to IFRS mandates some modifications to align with different regulatory frameworks in various geographical locations (WolvesAndFinance, 2018). In addition, differences in the conceptual framework contribute to these. The values and goals behind the GAAP and IFRS conceptual frameworks are not equal. These differences resulted in selection of particular treatment schemes for specific transactions and to the constant development in standards.
It is this dynamic nature of the business world that requires constant changes in accounting standards. Financial settings, technological developments and a consistently evolving regulatory system require accounting standards to be constantly updated in order to stay current (Horngren et al., 2014). From time to intensive working with stakeholders, the standard-setting authorities including FASB for GAAP and IABS on international financial reporting standards aimed to improve reliability of information.
Conclusion
In conclusion, with regard to dynamic factors in the business environment, since 2018, differences in GAAP and IFRS have substantially changed. Alterations in revenue recognition, leases, credit losses, and goodwill impairment highlight that standards should be updated. Due to differences in a variety of legal environments, conceptual framework diversity, business variation, transparency, and global comparability require regular updating.
References
WolvesAndFinance. (2018). The Difference between GAAP and IFRS [YouTube Video]. In YouTube. https://www.youtube.com/watch?v=8IJ3uUYAWmQ
Horngren, C. T., Sundem, G. L., Elliott, J. A., & Philbrick, D. R. (2014). Introduction to financial accounting. Pearson.
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