Business Accountant: GAAP And IFRS Accounting Standards
Running a business involves many considerations, proper business accounting is one of the most important. Although you may be worried about this facet of business keeping, with a SureBooks business accountant you can relieve yourself from this stressful financial situation. Our accounting team is ready to handle your businesses financial management. Our team is trained, trustworthy and ready to help you get your accounting practices up to standard.
At SureBooks we understand the integral importance of accounting standards and regulations in our own operations. They play a crucial role in ensuring financial stability and credibility. Let us learn more about these principles and why they are so important in accounting.
Business Accountant: Standards and Regulations
Accounting standards are sets of principles and guidelines that all accounting professionals (including of course the business accountant) and businesses should follow when preparing financial statements, ensuring transparency and uniformity in financial reporting around the world. They were developed by, and are regularly updated by several international accounting bodies such as the International Accounting Standards Board (IASB), the Financial Accounting Standards Board (FASB), and the Generally Accepted Accounting Principles (GAAP).
While not all accounting standards are the same and can vary according to industry, location, and business type, the most widely used accounting standards include the IASB and FASB standards which involve the IFRS (International Financial Reporting Standards). Businesses must also comply with local tax laws, and regulations, which differ across countries.
Business Accountant: Why are Accounting Standards Useful?
Accounting standards provide several benefits for businesses, hence why accountants follow the frameworks. Read further to learn some of the benefits of adopting accounting standards.
- Consistency: As previously mentioned, accounting standards provide a set of rules and guidelines for financial reporting, allowing companies to present their financial information in a uniform manner. This makes it easier to compare previous statements and current ones, as well as financial statements between different entities.
- Reliability And Relevance: Accounting standards help to produce reliable and relevant financial information about an organisation, eliminating and reducing the amount of inaccuracy and bias from the reporting.
- Builds Investor Confidence: Investors are more likely to trust an organisation that follows and adheres to accounting standards as they rely on standardised financial statements to evaluate the financial health and performance of companies. Accounting standards provide a framework that ensures integrity and transparency in financial reporting.
- Ensures Regulation Compliance: Companies are encouraged to follow the accounting standards set by the relevant regulation authorities in their country. If organisations don’t follow these standards and don’t meet reporting obligations, they could face penalties or even legal consequences.
In South Africa, It is best to work with our SureBooks accounting team to ensure that your business is fully compliant with all regulations and can safely avoid any legal hassles.
Business Accountant: The Most Common Global Standards
While the legal requirements for businesses to adhere to GAAP (Generally Accepted Accounting Principles) and the IFRS (International Financial Reporting Standards) vary, all businesses should follow their guidelines and incorporate them into practice to ensure transparency, consistency, and comparability in financial reporting. Both of these accounting standards make use of the following principles:
- Consistency: The business accountant of the organisation must apply the same standards through each step of the reporting process, as well as from one reporting cycle to the next. This makes it easier to compare business’s finances from report to report.
- Use Accrual Accounting Methods: This involves recording revenue at the time of sale, rather than at the time when payment is received. Direct expenses for goods sold or services rendered are recoded when the sale is transacted and indirect expenses are recorded when the expenses are paid.
- Sincerity: The business accountant should always try to provide objective and accurate information about the business’s finances is provided in the financial reporting.
- Non-Compensation: The business accountant provides complete transparency of positive and negative factors without any compensation. In other words, they do not get paid based on how good or bad their reporting of the company’s financial health turns out.
- Prudence: The financial data used is based on documented facts and is not influenced by rough calculations or bias.
- Continuity: Financial data collection and asset valuations should not disrupt normal business operations and be calculated on the assumption of the organisation’s continuity.
- Periodicity: Financial data should be organised and reported according to relevant accounting periods. For example, revenue or expenses should be reported within the relevant reporting period.
- Materiality: Material facts must only be relied on, and all material financial and accounting facts must be disclosed in financial reports.
- Good Faith: Honesty and completeness is used in all financial data collection and reporting.
Business Accountant: GAAP
GAAP is a set of accounting principles, standards, and guidelines that were established by the FASB and have evolved to remain relevant to changing business practices, regulatory requirements, and stakeholder needs. GAAP provides a framework for financial reporting, ensuring consistency, comparability, and transparency in financial statements. Its major rules and standards include the following points:
- Consider Depreciation And Capital Expenditure: Costs of major asset acquisitions must be accounted for over their entire lifetime, for example, an item that has a lifetime of 10 years is depreciated at 10% per annum, for ten years.
- Report Historical Costs: Some assets, such as property and equipment, are accounted for using their original purchase cost, rather than their current market values.
- Matching Principle: Matching expenses and revenues in the same time period must be recorded to accurately measure profitability and financial performance. This helps to reflect the economic benefits and sacrifices associated with the business’s activities.
- Full Disclosure Principle: Comprehensive and transparent disclosures in financial statements, including notes, supplimentaries, and extra information must be included, providing insight into the impact of transactions, accounting policies, and potential risks.
- Report Bad Debts: Companies that have a significant amount of money owed to them by customers or accounts receivables, must report the possibility that some of the money may not be received, becoming a bad debtor and thus losing revenue for the company.
Business Accountant: IFRS
The International Financial Reporting Standards have been accepted and adopted in over 140 countries, offering a more flexible approach to financial reporting compared to GAAP. When using the IFRS approach, financial statements are aimed to provide a faithful representation of an entity’s financial position, performance, and changes in its financial position. The financial statements should include the following documentation:
- A statement of profit and loss and other comprehensive income
- A statement of changes in equity
- A statement of cash flows
- Notes comprising of a summary of significant accounting policies and other explanatory information.
Just like GAAP, the IFRS also has a list of principles. Below is a list of some of the principals involved with IFRS:
- First-Time Adoption Of IFRS: IFRS provides the business accountant with specific guidance and exemptions for entities adopting the IFRS standards for the first time. This helps first-time users to transition smoothly from previously used accounting frameworks.
- Fair Value Investment: Financial instruments, investment properties, and certain other assets and liabilities are measured using a fair value assessment, reflecting current market conditions and economic realities.
- Plants Property and Equipment Revaluation: IFRS standards allows organisations to revalue their PPE according to the fair value assessment. The revaluation surplus or deficit is then re-categorised in other comprehensive income and accumulated in equity. This create a more dynamic approach to measuring PPE compared to GAAP, which uses the historical cost method.
Business Accountant: The Differences Between GAAP and IFRS
While GAAP and IFRS serve the same purpose of providing a framework for standardised financial reporting, there are several differences between the two approaches, the largest being that GAAP is rule-based, whereas IFRS is principle-based and allows more flexibility. Both methods have their pros and cons which should be evaluated before starting the financial reporting of your organisation. Some of the main differences between the two methods also include the following:
- Handling Inventory Costs: GAAP makes use of the last-in/first-out (LIFO) and first-in, first-out (FIFO) inventory cost methods. IFRS only uses the FIFO method.
- Handling Development Costs: GAAP treats development costs, such as research, as expenses or expenses incurred. IFRS treats development as a capital investment that is expensed and amortized over multiple periods.
- Write-Downs And Reversals: GAAP does not allow inventory or asset write-downs or reductions in value to be reversed, but IFRS allows write-downs to be reversed if inventory or asset values change.
- Fixed Asset Re-evaluation: GAAP records and reports fixed assets at historical cost, while IFRS allows businesses to adjust fixed assets at fair market value.
Both standards have similarities and differences, which is why research must be conducted before choosing which standard to refer to. Chat to your SureBooks business accountant and we can organise a system for you to help you sort out all your financial management obligations, and help you with your financial decision making.
Business Accountant: Emerging Trends of Sustainability
The financial standards of GAAP and IFRS have evolved over the years to incorporate sustainability and non-financial reporting. At SureBooks, when we write up annual reports, we like to incorporate these aspects to show how important it is to recognise environmental, social and governance factors and how they affect business performance and can be used to generate significant value for stakeholders. Reporting on sustainability and other non-financial aspects creates a holistic view of the organisations performance and impact on society.
Reporting on sustainability and other non-financial aspects creates many advantages for the business, including the following aspects:
Trust is built with stakeholders as non-financial reporting helps companies demonstrate their commitment to sustainability and recognition of how their business is part of a greater ecosystem of the world.
Risk management is shown as considering the ESG aspects as well as their risks contributes to managing the business’s continuity and long-term success.
Depending on the organisation’s manner of operating and the industry in which they operate, some ESG disclosure requirements might need to be met. Non-financial reporting helps companies comply with existing and upcoming regulatory requirements.
The reputation of the organisation will be enhanced as consideration for the business’s future as well as their surrounding environment is communicated. People are more likely to support organisations which show consideration for stakeholders and the environment.
Investors are increasingly considering ESG factors in their investment decision-making. Non-financial reporting provides investors with the information they need to assess a company’s ESG performance and how their investment will be used for the greater good as well as for business operations.
SureBooks Business Accountant: About SureBooks
Located in Cape Town, SureBooks is a go-to financial accounting services organisation. We know how much effort and time goes into managing a business, which is why we are here to help you handle the financial management side. Lower your stress levels and work with our SureBooks business accountant team. Our professional accountants can offer financial advice, complete your payroll services, ensure your tax compliance, and generate financial reports.
Check out our website for more information on what we do and how we can help.