What are GAAP and IFRS?
The most common accounting standard across the world is the Generally Accepted Accounting Principles (GAAPs) that originated from the United States. These accounting standards form the basis of the accounting standards that are acceptable across the world. GAAP was formulated with the primary role of recording the financial transactions of the institutions ("Accounting for Equity and Other Comprehensive Income: Dual Reporting Under US GAAP and IFRSs", 2010). The recorded information is important in depicting the state of the financial market and this is done through comparison of the financial statements. GAAP makes this a reality by setting up common rules and guidelines that need to be followed by the institutions in recording of the financial statements. The body that is mandated to guide companies and institutions that are based outside of the US is the International Accounting Standards Board (IASB). The intention of the body is to create uniformity in the approaches and guidelines that are to be followed in accounting reporting. However, the accounting standards for the different countries vary depending on the tax rules and governance (Lisowsky & Minnis, 2013). GAAP is monitored by the Financial Accounting Standards Board as a guarantor in matters of consistency in accounting reporting. For transparency purposes, the institution should be treated as a business entity in its own right (Wheeler, 2021).
Local accounting standards are the Generally Accepted Accounting Principles that are applicable and that follow the International Financial Reporting Standards. The first principle is the principle of consistency. The principle of consistency depict that the recording of particular items in the financial records should be recorded exactly the same way. The procedures used in the recording should also follow the exact same methods of recording. The principle of periodicity dictate that all the accounting recording should be done periodically. Financial recording should be done in particular set periods of time like on a quarterly basis or annually. Balance sheet for example, records information of accounts that happen on a particular date. The income statements on the other hand on the other hand are recorded over a given period of time. Adoption of these assumptions places the multinational on a platform that can be trusted by the relevant players in the market. This allows for easy tracking the institutions’ performance over a given period of time. The other principle that guide GAAP is the principle of continuity that dictate the cost of item recorded in the financial statements does not change with but rather remains static. This information gives the true valuation of the business. This information is relevant to the multinationals in the event that there is need to change the operations of the business. The liable experts find this information necessary in the event of mergers or acquisitions. This information is important for the interested parties before such a change is realised. There is also need for full disclosure of the business entity.
Multinationals should also exercise the principle of utmost good faith that mandates companies to provide all the information that is relevant to the public. These helps the institution management does not put themselves in a position that is not misleading to the investors and the financiers. The other principle that should guide financial reporting and recording is the principle of regularity that requires the multinationals to have a given set of system that is common to all the players in the market. Growth in the accounting practices have been seen to change in the coming years as the technology becomes more advanced. Manual recording was somewhere inconsistent but computer aided accounting in the modern day have made the dependency on the data recorded more reliable. Financial reporting helps placing the business in a position that the shareholders and other interested parties that can us analyse the performance of the business. The principle of prudence depict that all the accounting details should not be overstated. This means that accountants are supposed to exercise honesty in financial accounting and recording. This means the value that is calculated in the valuation should reflect the exact performance of the company. This would help the investors in the market may able to make informed decisions in deciding whether the company at hand is viable enough for investment. The investors can only make truly sound decisions if the company’s information provided is accurate.
The Importance of GAAP in Financial Reporting
The International Accounting Standards Board is responsible for the formulation of the IFRS rules. These rules apply for all the public companies across the world. The role of these standards is to allow for consistency in the recording of the accounting details. More specifically, the accounting standards dictate that the public companies should ensure transparency in the recording of the accounting details that would be availed to the public. This information in turn should be easily comparable across the world. The IFRS requirements is that the companies should give reports of the financial statements, income statements, cash flows and the changes in equity. IFRS and GAAP depict the same goals in consistency and transparency. However GAAP is primary used in the US while IFRS are used across the world. IFRS 1 is mandated to provide the companies with a guidelines that should be adopted in the IFRS. These means that the institutions involves should ensure a high level transparency in the information they provide. This plays the founding ground upon which all the information provided at the later date should compare with. The consistency should therefore be followed in the latter reporting. IFRS 3 is important in the operations of businesses that involve multiple companies in the market. This standard provides that the companies that intend to do business together either through acquisitions and mergers should provide information that is reliable and comparable. This information is important in ensuring that the acquiring or the merging companies measures the performance of the business through comparable assets and liabilities. IFRS 9 depends on the IAS 39 and it relates to the financial assets of a business entity. These standards provide the criterion that the business entities should follow in the valuation of the financial assets. IAS 39 adopts the use of fair value in the valuation of financial assets. The International Accounting Standards (IAS) are older than the IFRS, both of which were issued by the IASB. They developed to bring consistency and transparency in accounting. IAS depicts that financial reporting of the subsidiaries of the parent companies should be done separately. This is important in ensuring the company’s accountability apart from other companies under the same umbrella. Provision of all the financial statement is mandated to the parent entity that consolidates all the information required.
The UK has adopted the use of the International Accounting Standards (IAS) that are used as a tool for the presentation of financial accounts. These standards were developed by the International Accounting Standards Board. These standards are practically used in all organisations that operate across the world. This can also include the US acceptable GAAPs that allow companies that are based elsewhere to operate in the US financial market. Multinationals across the world should adopt the use of IAS since they are acceptable across the world expect the US which only allows the use of GAAPs. The IFRS financial statements depict the financial position of the of the institution as well as the statements of cash flows, changes in equity and other notes of financial statements. The general principles assume that the presentation of the financial statements assume that the institution would continue its operations indefinitely. The reporting of the financial statements should also ensure that there are no omissions since they could influence the decision making process. The reporting on the other hand should be done from time to time on a quarterly basis. The complete reporting should be done at the end of the financial year and this should be done consistently from year to year for comparison purposes. IAS 1 is more specifically used for the presentation of the financial statements. The multinationals are able to keep track of the financial records of the institutions and avail them to the stakeholders. The investors on the other hand can use this information to analyse on the viability for investment. The principle requires that the information shared should be consistent and should be recorded as though the multinational will operate indefinitely. IAS 2 depicts the manner in which the inventory should be reported. This includes items that required for the daily running of the business. Basically, these are the raw materials that used in the production process. The value of the finished goods are then compared with the cost of production in the calculation of the profit margin. This principle is generally use for the valuation of the institutions involved by comparing the output of the business against its input. This principle is important in understanding the performance of the business at a particular time. IAS 7 on the other hand is important in keeping track of the cash flows. This is important in the assessment of the capability of the business entity to engage in its operations as well the position of the entity for investment consideration.
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