Daniel Ragan

Professor John Daugherty

Accounting-120-02IN
19 July, 2015
GAAP & IFRS
The Generally accepted accounting principles and the International finance regulation
standards were created to help control the potential of people committing acts of fraud within a
company, by setting standards that were changed after large companies such as ENRON,
exposed flaws in the accounting system, resulting in one of the largest securities fraud in history
(Lawyershop). In the early 2000s, several other companies were uncovered for their lack of
accounting standards as well, therefore, the GAAP and IFRS were created to limit fraud and all
other unaccepted accounting procedures that could be misleading to the company or
stockholders.
While both methods were created to help establish a financially honest accounting system
for all businesses, there are similarities, and there are many differences between the two as well.
The GAAP was established to create a universally accepted set of principles that make it possible
to compare companies side by side without management being able to report misleading
numbers as ENRON did. Without using the GAAP a company will make itself vulnerable to
potential fraud, which in turn, could lead to a company filing bankruptcy, employees could lose
their job, and even worse their retirement benefits, if the company does not have any money left
after filing bankruptcy. The employees would be considered a priority claim, which puts them
halfway down the totem pole, in relation to being paid back according to business law, meaning
that the secured debts will be paid in full before moving to priority claims. (Intro to Business
Law). More importantly the GAAP supports the different accounting methods I will be
describing to help minimize the preceding potential liabilities. Companies should regularly

produce financial statements in order evaluate the business and determine future profits and
losses. The financial statements consist of: Income statements, retained earnings, balance sheet
and a statement of cash flows. The financial statements should provide information to accurately
reflect a companys current financial position, including any vital information to avoid causing
the business to making unethical decisions in the future. Because managers and other company
employees can be pressed to increase profits and maximize productivity, this can often be a
factor that provokes unethical financial reporting, which is certainly unenforced by the GAAP
(Financial & Managerial Accounting). The GAAP stands behind other concepts, such as the
Business entity concept and the cost concept, among others. The business concept limits the
economic data in an accounting system to data related directly to the activities of a business.
(Principles of Financial & Managerial Accounting) In short, this means that a business owner
should not mix their personal finances with that of a business because it can create complications
in the financial statements, making it much more difficult to truly identify whether the company
is profitable or not. Under the cost concept, amounts are initially recorded in the accounting
records at their cost or purchase price. (Financial & Managerial Accounting) This means that a
business should record the cost of an item such as a purchase of a building rather than what it is
valued at; should a business record the value of the building, rather than the amount the company
paid, it would be inflating the numbers reported on the financial statements which could lead to
further financial complications. The unit of measure concept is also very important because it
ensures that companies are using the same method of currency to perform transaction that they
have agreed upon suing the objectivity concept where each party is trying to receive the best
price available.

The IFRS is issued by the International Accounting Standards Board (Financial & Managerial
Accounting). The IFRS and IASB are working together to create a universally accepted
accounting method in order to make business transactions easier to handle. The IFRS is
considered to be more principles-based than the U.S GAAP, which is considered to be more
rules based (Financial & Managerial Accounting). Since the IFRS is compromised o standards
internationally, it is apparent that it be principle-based in comparison the GAAP operating within
more common boundaries of a single country with the same currency. The IFRS serves as a
global language so that company accounts are comparable across international boundaries.
(Wikipedia) International trade is a key economic concept to maximize the well-being for parties
so international trade I very important, but it is also more complicated and can create more risk
for the parties conducting business. Since different countries use different currencies, different
laws and even can have different ethical procedures, it is important that international business be
able to understand each other. Thus, the IFRS applies rules that will create a more common
ground in which two business can negotiate on common grounds.
While there are differences between the IFRS and the GAAP, many of which are a matter of
where the business is being conducted. The GAAP establishes common ground rules, primarily
within the country, while the IFRS creates principles for international business transactions.
Ultimately, the GAAP and the IFRS were created with a similar goal, to help ease the process of
all business transactions within a single country or between businesses in separate countries.

Works Cited
"Enron Fraud History of Enron The Enron Investigation." LawyerShop Site. Einstein Law, 2008.
Web. 19 July 2015.
"International Financial Reporting Standards." Wikipedia. Wikimedia Foundation, June-July
2015. Web. 19 July 2015.
Beatty, Jeffrey F., Susan S. Samuelson, and Patricia Sanchez Abril. "Chapter 13 Bankruptcy."
Introduction to Business Law. 5th ed. Boston: Cengage Learning, 2014. 237-38. Print.
Warren, Carl S., James M. Reeve, and Jonathan Duchac. "Chapter 1 Introduction to Accounting
and Business." Financial & Managerial Accounting. 12th ed. Mason: Cengage Learning, 2014.
2-10. Print.