A Statement Of Cash Flows Is Used Primarily To Generally Accepted Accounting Principles Vs. International Financial Reporting Standards

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Generally Accepted Accounting Principles Vs. International Financial Reporting Standards

What is globalization? Globalization is the act of expanding from the country of origin to other or even all regions of the world. As with its broad definition, globalization can be the basis of discussion for a wide range of topics. To narrow it down a bit, I will focus primarily on Generally Accepted Accounting Principles (GAAP) as compared to International Financial Reporting Standards (IFRS). I will point out some differences between IFRS and GAAP as well as some similarities between the two accounting standards. In addition, I will discuss several advantages and disadvantages of the United States converting from using GAAP to IFRS.

There are two main systems of accounting throughout the world, generally accepted accounting principles, also known as GAAP, and International Financial Reporting Standards, otherwise known as IFRS. According to The Business Dictionary, “GAAP provides an objective standard for judging and comparing financial data and its presentation and limits directors’ freedom to present an unrealistic picture through creative accounting” (4). This system comes with advantages as well as negative aspects. An advantage provided by GAAP is that the system is rule based, which means there is less room for exceptions (2). With this aspect, it becomes easy to prepare correct statements avoiding errors and mistakes. An additional advantage is that GAAP separates its various components into different parts. As far as disadvantages go, the main and arguably most important one is the non-existent universal way to standardize accounting. As a result, it becomes more difficult to compare the statements and records of other countries.

Generally Accepted Accounting Principles and International Financial Reporting Standards differ from each other and also have similarities. One difference is that in terms of consolidation, GAAP leans towards a risk and reward system, while on the other hand; IFRS favors the control model (2). There is another difference between the balance statements of each standard. When it comes to GAAP, there is no specific layout that exists for balance sheets and financial statements (1). In contrast to GAAP standards, IFRS has a stricter approach to accounting for these summaries and reports(1). They implement this approach by requiring a minimum list of line items to be present on statements. Another way in which the two accounting principles differ is that while both use the first in first out method (FIFO), IFRS strictly prohibits the use of the last in first out (LIFO) method, which GAAP allows companies to choose. Between LIFO and FIFO (2). Finally, an important difference to note is that GAAP is used only in the United States, while IFRS is used in more than 133 countries (3). The similarity that exists between these two accounting principles is the mutual inclusion of the following in their financial statements: balance sheet, income statement, changes in equity, cash flow statement and footnotes.

Over the years there has been talk of the United States converting generally accepted accounting principles into International Financial Reporting Standards (5). The adoption of IFRS by the United States will result in both advantages and disadvantages. A resulting advantage is the ability of foreign companies to more easily relate to existing information in the United States. Another advantage is that IFRS is already widely known, which effectively makes it more adaptable and adaptable so that other nations do not need to learn a new system. However, with all the advantages come some disadvantages. A major disadvantage is that IFRS lacks the level of certainty of GAAP (5). Without proper safeguards, fraudulent financial information incidents are more likely. Another drawback of conversion to IFRS is that people are unsure of how something new feels. Some companies do not know that this change will be beneficial for their business.

Finally, GAAP vs IFRS is a hotly debated debate about globalization. These two accounting systems have both their positives and negatives. Earlier, I defined what GAAP and IRFS are and gave some comparisons and differences about them. Also I mentioned several advantages and disadvantages of the two frameworks. Finally I provided the positives and negatives of the United States conversion from GAAP to IFRS.

Works Cited

1. Ernst and Young. US GAAP vs IFRS: The Basics. United Kingdom. Print.

2. Forges, Remy. “Is IFRS Different from US GAAP?” IFRS Resources. AICPA, n.d. Web. 13 April 2014. .

3. “GAAP vs IFRS.” Differences and comparisons. Diffen, ND Webb. 13 April 2014.

4. “Generally Accepted Accounting Principles (GAAP).” Business Dictionary. Web Finance, and the Web. 13 April 2014.

5. Ernst and Young. US GAAP vs IFRS: The Basics. United Kingdom, 2012. Print.

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