Identifies the key differences as well as the similarities between IFRS & US GAAP

Identifies the key differences as well as the similarities between IFRS & US GAAP

The correct answer and explanation is:

Correct Answer:

Key Differences and Similarities between IFRS and US GAAP

Similarities:

1. Both IFRS (International Financial Reporting Standards) and US GAAP (Generally Accepted Accounting Principles) are designed to provide transparency, consistency, and comparability of financial statements.
2. Both frameworks require the preparation of financial statements including a balance sheet, income statement, statement of cash flows, and statement of changes in equity.
3. Both emphasize the importance of accrual accounting and going concern assumptions.
4. They require disclosures that provide sufficient detail for users to understand a company’s financial position and performance.

Differences:

1. Rule-Based vs. Principle-Based: US GAAP is more rule-based, with detailed and specific guidelines for various scenarios. IFRS is more principle-based, offering broader guidance that allows more interpretation and judgment.
2. Inventory Methods: US GAAP permits the use of Last-In, First-Out (LIFO) method for inventory valuation. IFRS does not allow LIFO.
3. Development Costs: Under IFRS, development costs can be capitalized if specific criteria are met. US GAAP generally requires development costs to be expensed as incurred.
4. Reversal of Impairment Losses: IFRS allows reversal of impairment losses for assets other than goodwill if the value increases later. US GAAP does not permit reversal of impairment losses.
5. Measurement of Assets: IFRS allows more frequent revaluation of certain non-current assets like property, plant, and equipment to fair value. US GAAP generally uses historical cost with limited revaluation.

Explanation:

IFRS and US GAAP serve similar purposes in ensuring the reliability and comparability of financial reporting. Their main goal is to help investors, regulators, and other stakeholders make informed decisions. The similarities reflect the universal accounting objectives of consistency, accuracy, and transparency. However, the differences often arise from the legal, economic, and cultural environments in which each system was developed. While IFRS allows more flexibility and professional judgment, US GAAP emphasizes detailed compliance with rules to reduce ambiguity. These differences can significantly affect financial results and the decision-making of users, especially in global markets.