Alright, let's discuss some of the differences between GAAP and IFRS when it comes to financial statement analysis and the preparation of the income statement. So remember GAAP, these are the rules here in the USA, right? You guys know this by now. Financial Accounting Standards Board, the FASB, they're the ones creating GAAP here in the USA, the rules we focused on throughout this course, and internationally we've got the International Accounting Standards Board creating IFRS, the International Financial Reporting Standards. Okay? So let's go ahead and wrap up these differences between GAAP and IFRS in our analysis section.
We're going to see some similarities here, and this is the tools of financial analysis that we've learned here. We had horizontal analysis, vertical analysis, and we learned a whole bunch of ratios throughout this course, right? Well, those ratios are global. They don't particularly mean they're not GAAP that creates these ratios or IFRS. This is tools of financial analysis that don't really matter for the accounting rules themselves. We're using that information to analyze the financial statements. So those tools are the same across the globe.
Now, some of the specific rules, the way we deal with operating and unusual items. So remember, we've got operating, our day-to-day activities, and then unusual items, things that don't happen every day. Those could be unusual losses, or it could even be things like, you know, when we sell a piece of our equipment in the factory, that's not stuff we do every day. What we're going to have the same basic treatment for those transactions. We talked about discontinued operations, so this is when we're going to stop doing some portion of our business, right? Maybe we're a company that makes all sorts of food, and we're going to stop making cereal. Well, we're going to have to account for that cereal business separately and we're going to show it separately on our income statement, and we're going to do those same rules for GAAP and IFRS. The way we present it, we're going to always show our discontinued operations separately from our core operations that are continuing, okay?
So when we talk about a change in accounting principle, this could be where we're changing from, say, the weighted average method for accounting for inventory, and we're changing to the FIFO method. Well when we do that we need to retroactively restate information we've previously put out. We want to show as if we've always used the FIFO method so that all the information we're showing the multiple years of balance sheets and income statements, well it should show comparable results for inventory, so we want to retroactively restate it, and that's a change in accounting principle. Whereas with the change in accounting estimate, so we've got the principle and the estimate, so an estimate we might have made, maybe the estimated useful life of a machine. Well, this is an estimate. We made our best guess at the time that we purchased the machine and then we're going to update that information when we have better information, so we don't have to go back in time for those. We're just going to deal with those prospectively into the future, okay? And those rules are the same for GAAP and IFRS, okay? Retroactive for a change in principle, prospective for a change in estimate and lastly, the reporting of comprehensive income.
Remember, comprehensive income, this is pretty much beyond the scope of this class, but I like to think of it as the comprehensive income is just net income like we learn on our income statement plus some stuff, right? And this stuff is like abstract concepts, some higher-level accounting stuff like the revaluation of assets, dealing with unrealized gains and losses, things like that that are beyond the scope of this course for the most part, okay? So, in both cases, we're dealing with this comprehensive income gap and IFRS. And hooray, we get to the differences and we say there are no significant differences when we're dealing with our analysis and our presentation of our income statement, so we're done here. We're done with our GAAP and IFRS.
Remember, one of the biggest differences we saw between GAAP and IFRS was the revaluation of our long-term assets, okay? And we've talked about that in previous GAAP and IFRS videos and that's one of the key differences between GAAP and IFRS. If I was going to say three things to remember about GAAP and IFRS, the first would be that GAAP is more strict in that it has a more rules-based approach where they tell you more strictly what you need to do, where IFRS is more principles-based and gives the accountant a little more leeway in their judgment. The second one I'd say to remember is the revaluation that IFRS allows you to revalue your long-term assets. And the third one, what was the third one? I just had it in my head. Oh man. The third one, yes, I remember now. I had a moment of lapse, but I remember now is that IFRS does not allow the use of LIFO. Last in, first out, when it comes to inventory valuation. IFRS does not allow LIFO, okay? So those are the three main differences that I would like you to remember, and that's about it when it comes to GAAP versus IFRS here. Let's go ahead and move on to our next video.
