Accounting standards
A common set of standards and principles that makes up policies for financial accounting is referred as the accounting standard. Accounting standards is made to enhance the effectiveness in communicating financial information. It is like a common language used when businesses are reporting their business financial information, so that others may understand easily. Therefore, companies are required to follow a set of principles when releasing their financial information or statement to the public.
There are currently two sets of principles that are used worldwide: IFRS and GAAP.
The International Financial Reporting Standards (IFRS) originates from the European Union (EU). It was created as a common accounting language to make accounts accessible across the EU continent. The IFRS was released IN 2001 to replace the International Accounting Standards (IASs). Since then, the IFRS have spread globally and now are adopted by about 120 countries across the world.
On the other hand, the Generally Accepted Accounting Principles (GAAP) is an accounting standard that is widely used in the United States (US). It is also an accounting language developed to establish a common ground in communication of financial information across businesses in the US.
So what is the differences between IFRS and GAAP?
The main differences between IFRS and GAAP is detailed as below:
Principles vs Rules
The IFRS is principle based. Meaning, a set of general guidelines were listed down and users are expected to use their judgement in following the principles. However, the GAAP is a rules based accounting standard. It have a full list of very specific rules on how users should treat a large number of transactions. Such accounting standard can result in users manipulating the system’s rules to obtain better financial results.
LIFO vs FIFO
The IFRS only allows First In First Out (FIFO) method for inventory valuation whereas, the GAAP allows companies to use both the Last In First Out (LIFO) and FIFO method in the inventory valuation. Such LIFO system does not reflect the actual inventory flow
Inventory reversal
The IFRS permits reversal of the write-down value of an inventory according to the changes in market values. On the other hand, GAAP requires the inventory’s market value to be written down but the value recorded cannot be reversed if the market value has increased subsequently.
Charging for costs of development
In terms of charging the cost of development, IFRS allows amortization of the cost over a multiple period. It allows such costs to be deferred rather than charging them to expenses all at once. In GAAP, the development costs have to be charged to expenses as incurred. No deferment is allowed.
In short, there are many more small differences between these two types of accounting standard. Both IFRS and GAAP are constantly being adjusted and updated to fit to current changes.
Accounting standards in TreezSoft.
TreezSoft is a cloud accounting software for Small and Medium-sized Enterprises (SMEs). It allows you to access your financial information anytime, anywhere. TreezSoft uses series of automation and integration to enhance our clients’ accounting experiences. TreezSoft is developed and branded in Malaysia. TreezSoft's uses Malaysian Private Entities Reporting Standards (MPERS) which is substantially based on the IFRS for Small and Medium-sized Entities (SMEs). Therefore, SMEs can use TreezSoft with an ease of mind that all your reports will follow the standard accounting principles in Malaysia. You can TreezSoft to keep track their expenses, accounts, daily operation e.g. Point of Sales (namely QPOS) system and etc.
You can continue reading on reporting in TreezSoft blogs through these links:
Visit TreezSoft at http://www.treezsoft.com/ to sign up for a 30 days trial account with us!
You can also email us at [email protected] for more enquiries.