Difference Between IAS and GAAP (With Table)

All countries and government bodies follow specific accounting standards for all businesses. These accounting standards include guidelines, rules, and regulations, etc., for all the companies. These are followed as it is mandatory for companies to show their final financial report to government authorities. Two such accounting standards followed are IAS and GAAP.

IAS vs GAAP

The difference between IAS and GAAP is that IAS is a principle-based accounting method while GAAP is a rules-based accounting method. IAS is practiced by over 120 countries to deliver accounting statements. On the other hand, GAAP is specifically practiced mostly by companies based in the United States.

IAS stands for International Accounting Standards. These were issued by the International Accounting Standards Committee (IASC). However, IAS has now been replaced by International Financial Reporting Standards (IFRS). IAS standards were used for presenting the account statements such as balance sheets, salary statements, cash flow statements, variations in equity, footnotes, etc.

GAAP stands for Generally Accepted Accounting Principles. GAAP was issued by the Financial Accounting Standards Board (FASB), the authority that controls and updates GAAP. GAAP is a country-specific method and is only used mostly by the companies of the United States. GAAP ensures that the financial transactions of companies, cash flow, equity statements, income, etc, are transparent and well-executed.

Comparison Table Between IAS and GAAP

Parameters of ComparisonIASGAAP
Stands forInternational Accounting Standards.Generally Accepted Accounting Principles.
BasisIAS includes principle-based standards which are fixed.GAAP includes rule-based standards which can be edited according to the needs.
Active yearsThese standards were practiced from 1973 to 2001. Then they were replaced by IFRS.These standards were formed in 1933 and are still practiced.
Countries Accepted by over 120 countries.Accepted only in the USA.
Total standardsTotal 41 IAS standards have been issued.Total 10 GAAP standards have been issued.

What is IAS?

IAS stands for International Accounting Standards. These were the first international accounting standards throughout the world and were issued in 1973 by the International Accounting Standards Committee (IASC). IASC was established in the same year by the finance representatives of 10 countries. These representatives devised the standards for International Accounting Standards (IAS).

In 2001, IASC was replaced by the International Accounting Standards Board (IASB). IASB continued to develop the international standards under the new name International Financial Reporting Standards (IFRS). Even though IAS standards are still practiced, the new IFRS standards are an addition to the list of IAS standards. Hence, IAS standards are indirectly still indirectly active.

IAS is a planned method to understand a company’s financial status, future scope, tax payment, income levels, etc., so that the company can be internationally compared to other companies of the same domain. Ever since the European Union (EU) started practicing IAS standards for their companies in 2005, IAS has been introduced to many countries making it a global method for accounting.

Although IAS has become the most preferred accounting method, some countries like the USA, Canada, UK, etc., are still an exception as they accept the GAAP method to handle their companies’ financial status.

What is GAAP?

GAAP stands for Generally Accepted Accounting Principles. GAAP standards were developed jointly by the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB). The idea of GAAP was initiated when legislation passed the Securities Act 1933 and the Securities Exchange Act of 1934. Since then, GAAP has undergone several reforms and gradual improvements to become the United States’ accounting method. It is regarded as one of the best financial practices by many companies in the country.

GAAP devises objectives and guidelines for accounting statements and financial reports. It is mandatory for US-based companies to follow GAAP to compile their statements. GAAP provides a strong framework for companies to report their accounting reports consistently every year. GAAP standards are rules-based, so the GAAP procedures for the banking domain are different than those for the manufacturing domain and are different, again, for all other businesses.

GAAP also practices full disclosure reporting which means that the inclusion of in-depth material in the financial reports, so that the investors know exactly what they are investing their resources into. This makes GAAP one of the most trusted accounting methods.

GAAP’s foundation is defined by 10 basic principles including Regularity, Consistency, Sincerity, Permanence of Methods, Non-compensation, Prudence, Continuity, Periodicity, Materiality, and Faith.

Main Differences Between IAS and GAAP

  1. IAS is a principle-based method of accounting while GAAP is rules-based.
  2. IAS has a much wider reach and is practiced globally whereas GAAP is majorly practiced by US-based companies.
  3. IAS uses the weighted-average method and the first-in-first-out method. On the other hand, GAAP uses the weighted-average method, and both the last-in-first-out and first-in-first-out method.
  4. IAS standards have a better future as compared to GAAP because IAS has been expanding throughout the world and countries are slowly shifting towards the international method.
  5. In IAS, intangible assets are valued based on future economical benefits whereas in GAAP, intangible assets are valued at a fair value.

Conclusion

Accounting methods like IAS and GAAP are very necessary for a country for a clear vision of financial status. Accounting not only provides the financial status of a company, but it also helps judge which companies are beneficial for the country’s overall finances from the private sector, the tax paid, the salary of employees, etc. Even though IAS is now called IFRS, the principles and previous IAS standards still apply. There is a total of 17 IFRS standards and 41 IAS standards which collectively apply as accounting standards.

On the other hand, GAAP is based mostly in the US. As a result, it has limited reach. Even though the standard of work at GAAP is exceptional, comparing the companies that IAS and GAAP manage can be unfair. Because both IAS and GAAP work under different rules and regulations, GAAP often struggles to compare its client companies internationally. Due to this factor, countries are slowly shifting towards International Account Standards for their companies.

Even though IAS and GAAP work separately, the purpose served is practically the same. Even though accounting standards are complex, they make financial earnings look a lot more detailed and understandable. Whether a country approves IAS or GAAP solely depends on the advantages one provides over the other.

References

  1. https://www.sciencedirect.com/science/article/pii/S0165410110000352
  2. https://onlinelibrary.wiley.com/doi/abs/10.1111/1475-679X.00112

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