Admas University

School of Post-Graduate Studies

Department of Project Management
Managerial Accounting and Finance, MAPMC-621

Similarities and differences between GAAP and IFRS

Submitted by

Melaku Kassa (ID:4069/19)

Submitted To : (Ph.D.)

Addis Abeba

Date:-30/10/22

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Introduction to Accounting and Financial reporting

Accounting Standards are a set of principles or rules companies follow when they
prepare and publish their financial statements. The accounting standards govern the
reporting of transactions and events in financial statements.

Accounting reports are systematic and periodic statements that present the financial
status of a company at a certain point in time, or over a stated period. It details
business transactions and operations.

Based on every company’s competent management, we can find accounting reports.

Tracking the financial health of a business and its evolution over time is essential: to
organize important business transactions, and keep track of invoices, but also for
legal purposes. Generally, the purpose and function of accounting and financial
reporting can be stated as follows.

Why Do You Need Accounting and Financial Reports?

 Knowing the business's financial health: Generating accounting reports is

crucial for the correct management and functioning of a business. They
provide all the key information needed to paint an accurate picture of the
company’s financial health and help decision-makers make important
financial and non-financial decisions to ensure the company is growing
profitably.
 Maintaining a budget: To ensure the correct functioning of the different
strategies and activities, managers need to set a budget that will cover
everything while still ensuring profitability. This is a fundamental aspect,
especially considering that a shocking 82% of small businesses fail due to cash
flow mismanagement. Smart accounting reports prevent this from happening
by providing businesses with all the needed information to make the best
decisions and build a sustainable budget.
 Minimize errors: You might have full trust in your accountant's reporting
abilities, however, managing data and sensitive information manually is both
time-consuming and risky due to the possibility of human error. With modern
accounting reporting, generated with professional online reporting software,
the process of calculation and report generation is done automatically. This
means more time to make informed decisions as well as significant mitigation
of errors that can resonate across the organization.
 Organize transactions and invoices: Transparency is key when it comes to
efficient financial reporting. Reporting in accounting helps you do just that by
providing an efficient bookkeeping system of all transactions and invoices to
keep close track of every movement. Having a centralized location for

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 transactions with the time, date, and nature of the transaction helps
organizations understand money and goods distribution.
 Stay compliant with law and tax regulations: The risk of greed, theft, and
dishonesty exists everywhere – and every month we discover corporate
abuse somewhere in the world. Companies have to be held accountable for
their methods and ways of running a business, and therefore specific
accounting areas were enforced to eliminate fraud (auditing, income
taxation, …). For that purpose, monthly accounting reports serve as a means
for businesses to prove to authorities that they are staying compliant with
any laws and tax regulations, they assist organizations in calculating the
correct amounts of taxes to pay keeping in mind regulatory guidelines.
 Improve relationship with investors: As we said already, professional
accountant reports provide a complete picture of a company’s financial
health. This also proves to be a very useful document when it comes to
attracting new investors and keeping the ones you already have happy.

Accounting statements will let you keep track of business transactions, but they will
also help you maintain a budget, predict cash flow, and forecast revenue. They also
allow for an assessment of the current situation compared to a previous one and/or
compared to a forecast. The more accurate the records, the better the financial
analysis or projection.

In general, a well-implemented accounting reporting system makes it easier to

access the financial statements you need, whenever you need them. Good
accountancy helps financial analysts to understand and interpret the data, and thus
communicate it effectively. To do so, however, you need several tools: a good
accounting software, but also a solid online data visualization tool. We will go deeper
into the role of visuals for efficient financial analysis, but first, let's take a deeper
look into the common types of financial reports.

IFRS and GAAP

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The GAAP vs IFRS infers the two accounting standards and principles adhered to by
countries in the world regarding financial reporting.

A. GAAP (Generally Accepted Accounting Principles)

GAAP (generally accepted accounting principles) is a collection of commonly

followed accounting rules and standards for financial reporting.

GAAP specifications include definitions of concepts and principles, as well as

industry-specific rules. The purpose of GAAP is to ensure that financial reporting is
transparent and consistent from one public organization to another, and from one
accounting period to another.

GAAP emerged in the 1970s and involved the following four major rules and
standards:

1. Accrual accounting methods. GAAP uses accrual accounting, which records

revenue when a service or good is sold but not when payment is received; direct
expenses for goods sold are recorded when a sale is transacted, and indirect
expenses are recorded when expenses are paid.

2. Depreciation and capital expenditures. Costs of major asset acquisitions are

accounted for over the entire life of the asset. For example, an item with a 10-year
life is accounted for at 10% for 10 years.
3. Reporting of historical costs. Some assets -- such as property, equipment, and
facilities -- are accounted for using original purchase costs rather than current
market values.
4. Reporting of bad debts. Companies with significant money owed by customers, or
accounts receivable, must report the possibility that some or all of that money may
not be received and lost revenue.

GAAP is summarized by the following 10 general concepts:

1. Regularity: The business and accounting staff apply GAAP rules as

standard practice.

2. Consistency: Accounting staff applies the same standards through each

step of the reporting process and from one reporting cycle to the next, paying
careful attention to disclose any differences.

3. Sincerity: Accounting staff provides bjective and accurate information

about business finances.

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 4. Permanence: Accounting staff use cousesstent procedures in financial
reporting, enabling business finances to be compared from report to report.

5. No compensation: Accountants provide complete transparency of positive

and negative factors without any compensation. In other words, they do not
get paid based on how good or bad the reporting turns out.

6. Prudence: Financial data is based on documented facts and is not

influenced by guesswork.

7. Continuity: Financial data collection and asset valuations should not

disrupt normal business operations.

8. Periodicity: Financial data should be organized and reported according to

relevant accounting periods. For example, revenue or expenses should be
reported within the corresponding quarter or another reporting period.

9. Materiality: Accountants must rely on material facts and disclose all

material financial and accounting facts in financial reports.

10. Good Faith: There is an expectation of honesty and completeness in

financial data collection and reporting.

B. IFRS (International Financial Reporting Standards)

The IFRSs are published by the International Accounting Standards Board (IASB).IFRS
are announced in order to bring transparency, accountability and efficiency to
financial markets around the world. Since IFRS is a financial reporting language which
is widely used globally, it is better understood by the different users of the financial
statements.

The objectives of IFRS are:

 A single set of high-quality global accounting standards that bring consistency

in preparation of the financial statements;
 Bring transparency, accountability and efficiency in financial reporting; and
 Help investors, analysts and other users of financial statements to make
informed investment decisions.

IFRS is a global accounting and financial reporting language. It has been adopted in
more than 140 countries, including the UK, European Union, Canada, Australia,
Nigeria and Saudi Arabia. A major exception is the US which follows the US GAAP
(Generally Accepted Accounting Principles).

Who are the users of the financial statements according to IFRS standards?

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There are a variety of users of financial statements, each of whom may have
different information needs. The internal users are the management and employees.
There are a number of external users of the financial statements such as investors,
analysts, rating agencies, lenders and regulators.
IFRS requires that financial statements be prepared using four basic principles:

1.Clarity
2. Relevance
3. Reliability, and
4. Comparability

Similarities Between GAAP and IFRS

What are the similarities between GAAP and IFRS?

They both have the same accounting objectives where the income/ financial
statements should consist of balance sheet and cash flow statements.

They both use accrual accounting for their financial statements, meaning balance
sheets, which determine a company’s assets and liabilities and income statements,
the company’s revenue and expenses.

Both are guiding principles that help in the preparation and presentation of a
statement of accounts. A professional accounting body issues them, and that is why
they are adopted in many countries of the world. Both of the two provides
relevance, reliability, transparency, comparability, understandability of the financial
statement.

Tax: Regardless of companies’ geolocation, tax is required by every one to pay. Of

course, the amount depends on the accuracy of your reports.

Examine cash flow: This part is quite necessary for investors as it is this cash that
reimburses them. They want to ensure that the company has enough to disburse
and pay for their expenses.

Lease: the lease standard, which balance sheets should be marked as Right of Use
Assets, or have a report on, once the 12 months are surpassed.

Differences between GAAP and IFRS

Basis of comparison GAAP IFRS
Meaning A set of accounting
guidelines and
procedures, used by the
companies to prepare

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 their financial statements
is known as GAAP.
Acronyms Generally Accepted International Financial
Accounting Principles Reporting Standard
Based on Rules Principles
Developed By Financial Accounting International Accounting
Standard Board (FASB). Standard Board (IASB).
Inventory valuation FIFO, LIFO and Weighted FIFO and Weighted
Average Method. Average Method.
Reversal of Inventory Prohibited Permissible, if specified
conditions are met.
Development cost Treated as an expense Capitalized, only if certain
conditions are satisfied
Extraordinary items Shown below. Not segregated in the
income statement