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The treatment of acquired intangible assets helps illustrate why the International Financial Reporting Standards IFRS are considered more principles-based. Under IFRS, they are only recognized if the asset will have a future economic benefit and has measured reliability. Also, under IFRS, a write-down of inventory can be reversed in future periods if specific criteria are met.
The definition of discontinued operation is slightly different under IFRS guidelines. A company's asset or component is discontinued if the following are true:. There is also no condition precluding continuing involvement with IFRS treatment. Acquired intangible assets under GAAP are recognized at fair value. The move to a single method of inventory costing could lead to enhanced comparability between countries and remove the need for analysts to adjust LIFO inventories in their comparative analysis.
Under GAAP, once inventory has been written down, any reversal is prohibited. Discontinued operations are company assets or components of a business that the organization has already discontinued or plans to discontinue. For example, if the organization decides to discontinue or has already discontinued a major geographic area, plans to discontinue a major line of business, or discontinue a major equity method investment.
In these cases, the company is required to report on its income statement the results of operations of the asset or component for current and prior periods in a separate discontinued operations section. Accessed Oct. Securities and Exchange Commission. IFRS Foundation. Deloitte IAS Plus. Financial Statements. Your Money. Personal Finance.
Using the LIFO method may result in artificially low net income and may not reflect the actual flow of inventory items through a company. Both methods allow inventories to be written down to market value. However, if the market value later increases, only IFRS allows the earlier write-down to be reversed. Under GAAP, reversal of earlier write-downs is prohibited. Inventory valuation may be more volatile under IFRS. Under GAAP, revaluation is prohibited except for marketable securities.
Both standards allow for the recognition of impairment losses on long-lived assets when the market value of an asset declines. When conditions change, IFRS allows impairment losses to be reversed for all types of assets except goodwill. GAAP takes a more conservative approach and prohibits reversals of impairment losses for all types of assets.
Internal costs to create intangible assets, such as development costs, are capitalized under IFRS when certain criteria are met. These criteria include consideration of the future economic benefits. Under GAAP, development costs are expensed as incurred, with the exception of internally developed software.
For software that will be used externally, costs are capitalized once technological feasibility has been demonstrated. If the software will only be used internally, GAAP requires capitalization only during the development stage. IFRS has no specific guidance for software. GAAP requires that long-lived assets, such as buildings, furniture and equipment, be valued at historic cost and depreciated appropriately.
Under IFRS, these same assets are initially valued at cost, but can later be revalued up or down to market value. Any separate components of an asset with different useful lives are required to be depreciated separately under IFRS.
The IFRS approach is more theoretically correct, but also requires substantially more accounting effort. Write down reversals. GAAP requires that the value of an inventory asset or fixed asset be written down to its market value ; GAAP also specifies that the amount of the write-down cannot be reversed if the market value of the asset subsequently increases. Under IFRS, the write-down can be reversed.
The GAAP position is excessively conservative, since it does not reflect positive changes in market value. Development costs. GAAP requires that all development costs be charged to expense as incurred. IFRS allows certain of these costs to be capitalized and amortized over multiple periods. The IFRS position may be too aggressive, allowing for the deferment of costs that should have been charged to expense at once.
There are hundreds of smaller differences within each of the major topics of accounting, which are constantly being adjusted as the two standards are updated. Books Listed by Title. Articles Topics Index Site Archive. About Contact Environmental Commitment. Financial Accounting Standards Board. IFRS Foundation. Accessed March 4, Your Money.
Personal Finance. Your Practice. Popular Courses. GAAP vs. Key Takeaways GAAP is a common set of accepted accounting principles, standards, and procedures that companies and their accountants must follow when they compile their financial statements. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.
We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.
IFRS is principles based, so that general guidelines are set forth, and users are expected to use their best judgment in following the principles. LIFO inventory. LIFO tends to result in unusually low levels of reported income , and does not reflect the actual flow of inventory in most cases, so the IFRS position is more theoretically correct. Fixed asset valuation. GAAP requires that fixed assets be stated at their cost , net of any accumulated depreciation. IFRS allows fixed assets to be revalued, so their reported values on the balance sheet could increase.
The IFRS approach is more theoretically correct, but also requires substantially more accounting effort. Write down reversals. GAAP requires that the value of an inventory asset or fixed asset be written down to its market value ; GAAP also specifies that the amount of the write-down cannot be reversed if the market value of the asset subsequently increases. Under IFRS, the write-down can be reversed. The GAAP position is excessively conservative, since it does not reflect positive changes in market value.
Development costs. GAAP requires that all development costs be charged to expense as incurred. In addition to the multiple-step income statement in GAAP, unusual and infrequent items must be included as extraordinary items — extraordinary items are prohibited in IFRS. There is also a major difference between the two methods in relation to the LIFO last in first out cost flow assumption.
The differences between the two methods need to be resolved to benefit economic globalization. The different methods can be problematic to potential investors in international markets, because it will be difficult to interpret and understand financial information. It will be financially beneficial for the global economy when the accounting standards are merged into one set of rules. The FASB and IASB have issued a memorandum of understanding where they are to make the existing financial standards compatible, and once ensured, they intend on keeping compatibility.
In efforts to converge, FASB has issued a rule that permits a fair value option for financial instruments. In the SEC allowed some U. A unified set of accounting standards will provide companies, investors, creditors, financial users, etc. Your email address will not be published. All Rights Reserved. Web Design by Sharp Hue. Call now 1. Get Started. Contact Us Talk With an Expert. Leave a Reply Cancel reply Your email address will not be published.
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