Technology has improved the way business is done, making it possible to connect with customers and business contacts through the internet. If you want to maximize the success of your business, then you need to be sure that you are using modern accounting tools to support your financial tracking.

What resources are used in your business systems? It’s a great time to talk to an outsourced accounting team to learn more about the processes and modern accounting standards that can be used to improve your business systems.

Whether you are looking for options to improve your tax strategy or you need to systematize payment collection from your customers, a few good accounting standards can go a long way to improve your results.

Investing in the right accounting and bookkeeping software will help you tap into the resources that can be used to amp up your financial systems.

• What is Modern Accounting?
• What are Some Modern Accounting Standards?
• Understanding Accounting Standard
• What Are International Accounting Standards (IAS)?
• Is IFRS or GAAP Better?

What is Modern Accounting?

Before the invention of computers and the internet, business owners tracked their transactions by hand. These accounting ledgers were used to record money/products that moved in and out of the business account, and most of the transactions were paid in cash.

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If you go back thousands of years in history, it is possible to find ancient records that show accounting and business tracking in the most basic forms.

Now, the business world has changed. Technology is a foundational aspect of supporting the needs of a company. If you don’t accept digital payments, then it means that your customers are likely going to head to your competitors.

Not only do you need to integrate technology into your business systems, but you need to be sure that you are using the tools that are the right fit for your industry and individual needs.

Modern accounting means that you are using technology and accounting software programs to systematize your financial tracking. Every transaction that moves in and out of your account needs to be recorded.

There’s no need to write these things down by hand. Instead, you can leverage the automation of modern accounting software programs that take care of the tracking for you.

Even the accounting systems that use the most advanced technology available in the accounting industry are designed with double-entry bookkeeping systems. This approach means that there are always two entries for every transaction: debits and credits.

Double-entry accounting dates as far back as 1494, but it’s only been in recent years that these systems have been automated through software programs.

What are Some Modern Accounting Standards?

An accounting standard is a common set of principles, standards and procedures that define the basis of financial accounting policies and practices. Accounting standards improve the transparency of financial reporting in all countries.

In the United States, the Generally Accepted Accounting Principles form the set of accounting standards widely accepted for preparing financial statements. International companies follow the International Financial Reporting Standards, which are set by the International Accounting Standards Board and serve as the guideline for non-U.S. GAAP companies reporting financial statements.

Modern accounting and financial reporting standards are in place to enhance efficiency and public accountability within our democratic system of government. Adherence to modern accounting standards is a requirement of business accountants. The implementation of modern accounting standards improves efficiency and transparency in both the private and public sectors.

Generally Accepted Accounting Principles (GAAP)

The American Institute of Certified Accountants (AICPA) established a universal Code of Professional conduct that governs modern accounting. The code establishes a set of rules that specify how accounting records should be kept in modern accounting.

This modern standard of rules is called General Accepted Accounting Principles. The Securities and Exchange Commission (SEC) makes conformity to GAAP standards mandatory of all publicly traded companies.

The Federal Accounting Standards Advisory Board (FASAB)

The Federal Accounting Standards Advisory Board is responsible for developing GAAP principles for federal financial reporting entities. FASAB’s mission is to consider the financial and budgetary information needs for federal entities and develop accounting standards. GAAP principles also allow investors to access financial information of publicly traded companies.

As a result of modern accounting standards both public and private entities can provide interested parties with consistent and reliable financial information. The modern accounting system also provides assurance that governmental entities are conducting activities economically and in compliance with regulatory guidelines.

International Financial Reporting Standards Accounting Standards

Generally Accepted Accounting Principles are heavily used among public and private entities in the United States. The rest of the world primarily uses IFRS. Multinational entities are required to use these standards. The IASB establishes and interprets the international communities’ accounting standards when preparing financial statements.

Understanding Accounting Standard

Accounting standards relate to all aspects of an entity’s finances, including assets, liabilities, revenue, expenses and shareholders’ equity. Specific examples of an accounting standard include revenue recognition, asset classification, allowable methods for depreciation, what is considered depreciable, lease classifications and outstanding share measurement.

A Little History

The American Institute of Accountants, which is now known as the American Institute of Certified Public Accountants, and the New York Stock Exchange attempted to launch the first accounting standards in the 1930s.

Following this attempt came the Securities Act of 1933 and the Securities Exchange Act of 1934, which created the Securities and Exchange Commission. Accounting standards have also been established by the Governmental Accounting Standards Board for accounting principles for all state and local governments.

Accounting standards specify when and how economic events are to be recognized, measured and displayed. External entities, such as banks, investors and regulatory agencies, rely on accounting standards to ensure relevant and accurate information is provided about the entity.

These technical pronouncements have ensured transparency in reporting and set the boundaries for financial reporting measures.

What Are International Accounting Standards (IAS)?

International Accounting Standards (IAS) are older accounting standards issued by the International Accounting Standards Board (IASB), an independent international standard-setting body based in London. The IAS were replaced in 2001 by International Financial Reporting Standards (IFRS).

International accounting is a subset of accounting that considers international accounting standards when balancing books.

International Accounting Standards (IAS) were the first international accounting standards that were issued by the International Accounting Standards Committee (IASC), formed in 1973.

The goal then, as it remains today, was to make it easier to compare businesses around the world, increase transparency and trust in financial reporting, and foster global trade and investment.

Globally comparable accounting standards promote transparency, accountability, and efficiency in financial markets around the world. This enables investors and other market participants to make informed economic decisions about investment opportunities and risks and improves capital allocation.

Universal standards also significantly reduce reporting and regulatory costs, especially for companies with international operations and subsidiaries in multiple countries.

Moving Toward New Global Accounting Standards

There has been significant progress towards developing a single set of high-quality global accounting standards since the IASC was replaced by the IASB. IFRS have been adopted by the European Union, leaving the United States, Japan (where voluntary adoption is allowed), and China (which says it is working towards IFRS) as the only major capital markets without an IFRS mandate.

As of 2018, 144 jurisdictions required the use of IFRS for all or most publicly listed companies, and a further 12 jurisdictions permit its use.

The United States is exploring adopting international accounting standards. Since 2002, America’s accounting-standards body, the Financial Accounting Standards Board (FASB) and the IASB have collaborated on a project to improve and converge the U.S. generally accepted accounting principles (GAAP) and IFRS.

However, while the FASB and IASB have issued norms together, the convergence process is taking much longer than was expected—in part because of the complexity of implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Securities and Exchange Commission (SEC), which regulates U.S. securities markets, has long supported high-quality global accounting standards in principle and continues to do so.

In the meantime, because U.S. investors and companies routinely invest trillions of dollars abroad, fully understanding the similarities and differences between U.S. GAAP and IFRS is crucial. One conceptual difference: IFRS is thought to be a more principles-based accounting system, while GAAP is more rules-based.

What are the Principles of GAAP?

GAAP is the abbreviation of Generally Accepted Accounting Principles. GAAP is not necessarily a collection of rules and guidelines, though GAAP uses those. Rather, GAAP represents a collection of broad concepts and detailed practices that represent best accounting practices as it is accepted at a given time, and often within a specific industry.

Reporting according to GAAP provides a measure of uniformity so that those examining financial statements have a foundation from which to compare performance to another period or another company, or develop financial ratios that use specific GAAP-defined quantities.

Even though there is no overseeing authority, GAAP depends on a rule of four in terms of key assumptions, basic principles and basic constraints. There are four of each.

Key Assumptions About GAAP

The first key assumption comprising GAAP is that the business entity is separate and distinct from all others. This means that all of the figures shown in the organization’s financial reports are specific only to that organization, that no other separate business entity is obligated to contribute to the organization or can lay claim to the business’ bottom line revenues.

The second key assumption is that the business is a going concern, and will be for the foreseeable future. That length of foreseeable future is at least one year.

A third key assumption is that amounts listed in the organization’s financial statements are stated in terms of a stable currency. All amounts are listed in the same currency, meaning that an international company cannot report results in a combination of dollars, euros, dinars, sterling or any currencies used in the countries in which the company operates.

The organization can choose to report in any currency it chooses – unless it is a public company reporting for American investors – but the currency has to be used consistently throughout the financial report.

The final key assumption is that the time period stated in financial reporting is accurate. If the time period is identified as including January 1 through December 31 of a single year, then GAAP dictates that all transactions included in the report did indeed occur within the identified time period.

Four Basic Principles

GAAP’s four basic principles address the matters of costs, revenues, matching and disclosure. The cost principle refers to the fact that all listed values are accurate and reflect only actual costs, rather than any market value of the cost items. The revenue principle of GAAP is that revenue is reported when it is recognized.

Times of revenue recognition can vary depending on whether the organization uses the cash or accrual method of accounting, but the GAAP principle is that it will be recognized in a timely manner.

The matching GAAP principle matches revenues with expenses. This means that the expenses of a revenue producing activity are reported when the item is sold, rather than when the organization receives payment for it or when it issues an invoice for it.

The disclosure principle associated with GAAP requires that information anyone assessing the organization’s financial standing would need is included in the reporting of the organization’s financial status.

Four Constraints

The four basic constraints associated with GAAP include objectivity, materiality, consistency and prudence. Objectivity includes issues such as auditor independence and that information is verifiable. Materiality refers to the completeness of information included in financial reporting and whether information would be valuable to outside parties.

Consistency requires that the organization uses the same accounting methods from year to year. If it chooses to change accounting methods, then it must make that statement in its financial reporting statements. Prudence requires that auditors and accountants choose methods that minimize the possibility of overstating either assets or income.

Understanding GAAP

GAAP helps govern the world of accounting according to general rules and guidelines. It attempts to standardize and regulate the definitions, assumptions, and methods used in accounting across all industries. GAAP covers such topics as revenue recognition, balance sheet classification, and materiality.

The ultimate goal of GAAP is ensure a company’s financial statements are complete, consistent, and comparable. This makes it easier for investors to analyze and extract useful information from the company’s financial statements, including trend data over a period of time. It also facilitates the comparison of financial information across different companies.

These 10 general concepts can help you remember the main mission of GAAP:

1.) Principle of Regularity

The accountant has adhered to GAAP rules and regulations as a standard.

2.) Principle of Consistency

Accountants commit to applying the same standards throughout the reporting process, from one period to the next, to ensure financial comparability between periods. Accountants are expected to fully disclose and explain the reasons behind any changed or updated standards in the footnotes to the financial statements.

3.) Principle of Sincerity

The accountant strives to provide an accurate and impartial depiction of a company’s financial situation.

4.) Principle of Permanence of Methods

The procedures used in financial reporting should be consistent, allowing comparison of the company’s financial information.

5.) Principle of Non-Compensation

Both negatives and positives should be reported with full transparency and without the expectation of debt compensation.

6.) Principle of Prudence

Emphasizing fact-based financial data representation that is not clouded by speculation.

7.) Principle of Continuity

While valuing assets, it should be assumed the business will continue to operate.

8.) Principle of Periodicity

Entries should be distributed across the appropriate periods of time. For example, revenue should be reported in its relevant accounting period.

9.) Principle of Materiality / Good Faith

Accountants must strive to fully disclose all financial data and accounting information in financial reports.

10.) Principle of Utmost Good Faith

Derived from the Latin phrase “uberrimae fidei” used within the insurance industry. It presupposes that parties remain honest in all transactions.

Compliance with GAAP

If a corporation’s stock is publicly traded, its financial statements must adhere to rules established by the U.S. Securities and Exchange Commission (SEC). The SEC requires that publicly traded companies in the U.S. regularly file GAAP-compliant financial statements in order to remain publicly listed on the stock exchanges.

GAAP compliance is ensured through an appropriate auditor’s opinion, resulting from an external audit by a certified public accounting (CPA) firm.

Although it is not required for non-publicly traded companies, GAAP is viewed favorably by lenders and creditors. Most financial institutions will require annual GAAP compliant financial statements as a part of their debt covenants when issuing business loans. As a result, most companies in the United States do follow GAAP.

If a financial statement is not prepared using GAAP, investors should be cautious. Without GAAP, comparing financial statements of different companies would be extremely difficult, even within the same industry, making an apples-to-apples comparison hard.

Some companies may report both GAAP and non-GAAP measures when reporting their financial results. GAAP regulations require that non-GAAP measures be identified in financial statements and other public disclosures, such as press releases.

The hierarchy of GAAP is designed to improve financial reporting. It consists of a framework for selecting the principles that public accountants should use in preparing financial statements in line with U.S. GAAP. The hierarchy is broken down as follows:

• Statements by the Financial Accounting Standards Board (FASB) and Accounting Research Bulletins and Accounting Principles Board opinions by the American Institute of Certified Public Accountants (AICPA)
• FASB Technical Bulletins and AICPA Industry Audit and Accounting Guides and Statements of Position
• AICPA Accounting Standards Executive Committee Practice Bulletins, positions of the FASB Emerging Issues Task Force (EITF), and topics discussed in Appendix D of EITF Abstracts
• FASB implementation guides, AICPA Accounting Interpretations, AICPA Industry Audit and Accounting Guides, Statements of Position not cleared by the FASB, and accounting practices that are widely accepted and followed

Accountants are directed to first consult sources at the top of the hierarchy and then proceed to lower levels only if there is no relevant pronouncement at a higher level. The FASB’s Statement of Financial Accounting Standards No. 162 provides a detailed explanation of the hierarchy.

GAAP vs. IFRS

GAAP is focused on the accounting and financial reporting of U.S. companies. The Financial Accounting Standards Board (FASB), an independent nonprofit organization, is responsible for establishing these accounting and financial reporting standards. The international alternative to GAAP is the International Financial Reporting Standards (IFRS), set by the International Accounting Standards Board (IASB).

The IASB and the FASB have been working on the convergence of IFRS and GAAP since 2002. Due to the progress achieved in this partnership, the SEC, in 2007, removed the requirement for non-U.S. companies registered in America to reconcile their financial reports with GAAP if their accounts already complied with IFRS.

This was a big achievement because prior to the ruling, non-U.S. companies trading on U.S. exchanges had to provide GAAP-compliant financial statements.

Some differences that still exist between both accounting rules include:

• LIFO Inventory: While GAAP allows companies to use the Last In First Out (LIFO) as an inventory cost method, it is prohibited under IFRS.
• Research and Development Costs: These costs are to be charged to expense as they are incurred under GAAP. Under IFRS, the costs can be capitalized and amortized over multiple periods if certain conditions are met.
• Reversing Write-Downs: GAAP specifies that the amount of write-down of an inventory or fixed asset cannot be reversed if the market value of the asset subsequently increases. The write-down can be reversed under IFRS.

As corporations increasingly need to navigate global markets and conduct operations worldwide, international standards are becoming increasingly popular at the expense of GAAP, even in the U.S. Almost all S&P 500 companies report at least one non-GAAP measure of earnings as of 2019.

GAAP is only a set of standards. Although these principles work to improve the transparency in financial statements, they do not provide any guarantee that a company’s financial statements are free from errors or omissions that are intended to mislead investors.

There is plenty of room within GAAP for unscrupulous accountants to distort figures. So, even when a company uses GAAP, you still need to scrutinize its financial statements.

Is IFRS or GAAP Better?

The International Financial Reporting Standards (IFRS), the accounting standard used in more than 110 countries, has some key differences from the United States’ Generally Accepted Accounting Principles (GAAP).

At the conceptual level, IFRS is considered more of a principles-based accounting standard in contrast to GAAP, which is considered more rules-based. By being more principles-based, IFRS, arguably, represents and captures the economics of a transaction better than GAAP. Some of the differences between the two accounting frameworks are highlighted below.

IFRS

The treatment of acquired intangible assets helps illustrate why IFRS is considered more principles-based. Under IFRS, they are only recognized if the asset will have a future economic benefit and has measured reliability. Intangible assets are things like goodwill, R&D, and advertising costs.

Under IFRS, the last-in, first-out (LIFO) method for accounting for inventory costs is not allowed. Also, under IFRS, a write-down of inventory can be reversed in future periods if specific criteria are met.

Discontinued Operations

The definition of discontinued operation is slightly different under IFRS guidelines. A company’s asset or component is discontinued if the following are true:

• The component has been disposed of or is classified as held for sale.
• The component represents a separate line of business or area of operation; is part of a premeditated, coordinated plan to remove that separate line of business or area of operation; or is a subsidiary component that has been exclusively purchased with the intent to resell.

An entity using IFRS rules can classify equity method investments as “held for sale,” which is not possible under GAAP. There is also no condition precluding continuing involvement with IFRS treatment. Like GAAP, however, discontinued operations under IFRS are represented by their own section on an income statement.

U.S. GAAP

Acquired intangible assets under GAAP are recognized at fair value. Under GAAP, either LIFO or first-in, first-out (FIFO) inventory estimates can be used. 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 comparison analysis.

Discontinued Operations

Discontinued operations are company assets or components that have either been disposed of or are being held for sale.

Under GAAP, discontinued operations receive unique presentation treatment. A company should only be reported as a discontinued operation on a financial statement if:

• Resulting elimination: The disposal or pending sale results in the component or asset being completely removed from company operations.
•  Continuing involvement: Once the disposal or sale is complete, there is no continuing involvement by the company with respect to the component or asset.

If these conditions are both present, 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.

We live in an increasingly global economy, so it’s important for business owners and accounting professionals to be aware of the differences between the two predominant accounting methods used around the world. 

International Financial Reporting Standards (IFRS) – as the name implies – is an international standard developed by the International Accounting Standards Board (IASB). U.S. Generally Accepted Accounting Principles (GAAP) is only used in the United States. GAAP is established by the Financial Accounting Standards Board (FASB).

Let’s look at the 10 biggest differences between IFRS and GAAP accounting.

Local vs. Global

IFRS is used in more than 110 countries around the world, including the EU and many Asian and South American countries. GAAP, on the other hand, is only used in the United States. Companies that operate in the U.S. and overseas may have more complexities in their accounting.

Rules vs. Principles

GAAP tends to be more rules-based, while IFRS tends to be more principles-based. Under GAAP, companies may have industry-specific rules and guidelines to follow, while IFRS has principles that require judgment and interpretation to determine how they are to be applied in a given situation.

However, convergence projects between FASB and IASB have resulted in new GAAP and IFRS standards that share more similarities than differences. For example, the recent GAAP standard for revenue from contracts with customers, Auditing Standards Update (ASU) No. 2014-09 (Topic 606) and the corresponding IFRS standard, IFRS 15, share a common principles-based approach.

Inventory Methods

Both GAAP and IFRS allow First In, First Out (FIFO), weighted-average cost, and specific identification methods for valuing inventories. However, GAAP also allows the Last In, First Out (LIFO) method, which is not allowed under IFRS. Using the LIFO method may result in artificially low net income and may not reflect the actual flow of inventory items through a company.

Inventory Write-Down Reversals

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.

Fair Value Revaluations

IFRS allows revaluation of the following assets to fair value if fair value can be measured reliably: inventories, property, plant & equipment, intangible assets, and investments in marketable securities. This revaluation may be either an increase or a decrease to the asset’s value. Under GAAP, revaluation is prohibited except for marketable securities.

Impairment Losses

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.

Intangible 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.

Fixed Assets

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.

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Any separate components of an asset with different useful lives are required to be depreciated separately under IFRS. GAAP allows for component depreciation, but it is not required.

Investment Property

IFRS includes the distinct category of investment property, which is defined as property held for rental income or capital appreciation. Investment property is initially measured at cost, and can be subsequently revalued to market value. GAAP has no such separate category.

Lease Accounting

While the approaches under GAAP and IFRS share a common framework, there are a few notable differences. IFRS has a de minimus exception, which allows lessees to exclude leases for low-valued assets, while GAAP has no such exception.

The IFRS standard includes leases for some kinds of intangible assets, while GAAP categorically excludes leases of all intangible assets from the scope of the lease accounting standard.

Understanding these differences between IFRS and GAAP accounting is essential for business owners operating internationally. Investors and other stakeholders need to be aware of these differences so they can correctly interpret financials under either standard.