Financial accountability and transparency are crucial in different business environments. There is a need for standard rules that have to be adhered to. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) offer fundamental guidelines that dictate how financial reporting and other aspects related to organizational finances should be approached( Bohusova et al., 2009) . While there is an intersection between the two and hence many similarities, there are also notable differences. One of the major similarities is the conceptual framework used in their development. Fundamentally, both apply an income statement, cash flow statement, and a balance sheet in making different financial records. Closely related to this, Both GAAP and IFRS standards pursue the same methodology in the preparation of a balance sheet. It is made on an accrued basis (Lemus,2014).
The two systems notably differ in various ways. First of all, While GAAP is based on specific set rules, IFRS is based on particular standards. This implies that while it is impossible to interpret particular financial aspects differently when GAAP standards are applied, when IFRS is applicable, some financial statement aspects can be interpreted differently. Besides the above, they also differ in that while GAAP is highly strict in terms of financial statement preparation approach, IFRS is less strict. In terms of the geographical location they apply to, while GAAP is only applicable in the US, IFRS applies to over 110 countries worldwide. Also, while inventory reversal is prohibited under GAAP standards, it is allowed under the IFRS system, but a particular criterion has to be followed.
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GAAP and IFRS should converge because of the resultant ease of financial decision making by investors, creditors, businesses, among others. Besides, with a single accounting system, businesses, companies, and other stakeholders can have a thorough understanding of what is required of them regardless of where they operate. This helps in the reduction of liabilities that result from the inability to comply with either standards.
Bohusova, H., & Nerudova, D. (2009). US GAAP and IFRS convergence in the area of revenue recognition. Economics and Management , (14), 12-19.
Edel Lemus, M. I. B. A. (2014). The similarities and differences between the financial reporting standards under United States. GAAP versus IFRS. Global Journal of Management And Business Research .
