Investment is one of the core spheres in accounting, therefore, many systems of standards are suggested for implementation. However, the two most popular ones are the International Financial Reporting Standards (IFRS) and the United States’ Generally Accepted Accounting Principles (GAAP). Over the last years, there has been a number of unsuccessful attempts in the integration of those systems, therefore, it is obvious that they have something in common. However, in the sphere of investment, some differences make them unlike, therefore, companies have to estimate the benefits and losses of implementation of each system and choose the appropriate one.
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The standards related to investing in both systems are related to the concept of fair value that is depicted in the IFRS 13 and ASC 820 acts. Those concepts are almost similar in those two systems, however, the differences lie in the estimation rules prescribed in other standards. For example, IFRS and GAAP vary in the issues concerning the investment property. The major difference is in the fact that the U.S. GAAP does not have the term “investment property.”
According to the American standard system, the assets are whether classified as earmarked for sale or fixed assets intended for rent. The investment property includes such objects as the ground for resale or utilization in a long-term outlook, buildings as the company’s property which is leased on contract, or any other immovable property. Here, according to the IFRS, a great role plays the aim of possession of the property. For example, if it is utilized for manufacturing or selling of goods or services, administrative goals, or getting profit from operating activities, the objects cannot be considered as “investment property.” Under this term are counted only the objects which are likely to bring economic profit, or if the properties’ cost can be evaluated. The property as mentioned in the IAS 40 is first estimated according to the prime cost including purchase costs. Then the valuation of the “investment property” is fulfilled with the help of various models such as the cost model or the fair value model. However, this model of “investment property” is not implemented in the U.S. GAAP, instead, it is classified as an asset or real estate.
The implementation of the IFRS began in the 20th century, however, new standards are constantly developed and edited according to the changes in accounting. According to Rahim (2021), investment companies start paying more attention to the International Financial Reporting Standards as major changes in US financial reporting are expected in the next several years. The author states as well that even US companies start choosing the international system instead of the American one because it is not industry-specific. However, according to the start of the utilization of the two standard systems in some firms in the European Union, significant differences across the GAAP and the IFRS were not found. Rahim (2021) states as well that some economic consequences related, for example, to the liquidity or cost of capital, were shown after the adoption of international standards. It is not obvious which standard system is preferable, however, some scientists explain that the IFRS is more capital-market oriented.
The IFRS is more relevant to investors as it shows more respect to data and gives more attention to the prevention of disclosure. More and more firms not only in the United States but worldwide start choosing the International Financial Reporting Standards system, however, the American GAAP is popular as well but mostly among American companies. However, the integration process between two systems was stopped because of some disagreements, and new changes made the difference even bigger.
Rahim, J. M. S., & Twana, Y. A. (2021). A comparison of IFRS and US GAAP with potential effects on investment analysis. PalArch’s Journal of Archaeology of Egypt/Egyptology, 18(4), 6177-6187.