GAAP and IFRS
The abbreviations GAAP and IFRS may not mean anything to the average person, but they’re very familiar to those in the appraisal industry.
GAAP stands for Generally Accepted Accounting Principles. GAAP is a collection of principles regarding how corporations prepare their income, expenses, assets, and liabilities on their financial statements, and is standard in the United States. GAAP is an aggregate of many rules on how to account for various transactions.
IFRS stands for International Financial Reporting Standards. IFRS is a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements. IFRS is issued by the International Accounting Standards Board.
The reason that GAAP and IFRS are noteworthy is because the Securities and Exchange Commission (SEC) will decide by the end of this year if U.S. companies will be required to use IFRS beginning in 2014. If so, U.S. companies will experience an unprecedented change in accounting standards as key aspects of U.S. GAAP and IFRS converge. Aspects of that change include:
Inventory
The last-in-first-out (LIFO) methodology for inventory is prohibited under IFRS. The change to IFRS would force a company to adopt the first-in-first-out (FIFO) methodology, or weighted average cost method. The adoption of a new costing method could significantly impact the operating results of an entity.
Carrying Value of Assets
Under GAAP, assets are generally carried at historical cost (with a few exceptions for certain financial instruments), whereas under IFRS, historical cost is the primary basis of accounting. The ability to revalue assets (to fair market value) is allowed, though. By revaluing assets, there may be significant differences in the carrying value of these assets versus GAAP.
Depreciation
IFRS requires that separate, significant components of an item of property, plant, or equipment be recorded and depreciated separately. If an asset has multiple aspects, each with different “lives,” the asset must be depreciated in segments, rather than as a whole. IFRS annually evaluates the residual value of an asset at the balance sheet date.
These changes, if and when enacted, will require accountants to use certified appraisers.
We’ll keep you posted as we near the end of 2010 and the SEC makes its final decision.
Present Value LLC is a nationwide appraisal and advisory company that provides a range of professional services such as Certified Machinery and Equipment Appraisals, Inventory Appraisals, Asset Verification Services, Business Valuations, and Real Estate Appraisals. Contact us today!
By: Present Value
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