So throughout our discussions, we've been focused on GAAP, generally accepted accounting principles, which are the rules in the USA. But like we've talked about, there's international rules too, IFRS. So throughout this book, what we do is we compare the rules in GAAP with the rules in IFRS, which for the most part are very similar. But there are some key differences between them too. So let's go ahead and just introduce the differences between GAAP and IFRS now. So remember, in the USA, we've got generally accepted accounting principles and they're set by the Financial Accounting Standards Board. So the FASB, Financial Accounting Standards Board, they produce GAAP. Okay? And that's the rules that we follow in the US and that's what we're basically focused on throughout the class. But international standards, well the international standards are the IFRS, International Financial Reporting Standards, and they're set by the International Accounting Standards Board. A lot of letters there, a lot of words, but it's very easy to know which one's the international one. Because the International Accounting Standards Board does the International Financial Reporting Standards, IFRS. We've got the I, International, International. We know we're talking about international with that one. Okay? So like I said, there's going to be some key differences and similarities between the two.
Now for the most part, what's happening is that they're trying to converge a lot of these standards because they want to have one set of rules throughout the world. And why would they need this kind of standard set of rules? And it's happening more and more now that we need this kind of single global set of accounting standards. But the US, since it's basically a forerunner in the business world, well we have our own set of rules and for the most part, they're a lot more stringent than the international rules. So let's see some of the reasons why this is becoming more and more relevant that we want to have a single set of standards. First, there are multinational corporations. This is a huge, huge issue here, right? We've got companies that sell products throughout the world. Think about Coca Cola, McDonald's, Toyota, right? They have products throughout the world. They have restaurants set up in every different country. And there's going to be different laws in every country and different ways to do accounting and different ways to do reporting. So this asks for the need for a single set of standards. Mergers and acquisitions. This is when companies join together. There's business combinations. Well, if they're from different countries with different accounting standards, that can complicate the accounting afterward, after they've merged. Right? And now, information technology. Now with the internet, things are much more global. We have a lot more international trade happening. It's very seamless and efficient and it just lends itself to more of an international standard to be set. Finally, the same thing with financial markets, that they're becoming more global on a daily basis. Right? And we have global markets for stocks, for bonds, and currencies as well. Okay? So throughout each chapter, what we're going to do is we're going to have basically a little summary of the similarities and differences between GAAP and IFRS, okay? And these are usually going to be quick lessons, just to kind of point out the differences. We don't especially in your class, you don't really go into deep details about how we account for things differently in IFRS. It's better to just know the key differences. So let's go ahead and see some of the similarities and differences just in the fundamentals of accounting.
So what we're going to see is with GAAP and IFRS, the basic techniques for recording, are going to be the same. We're going to still use a journal entry system, which we'll talk about more as we continue the course. And a lot of what we do is very similar in that in instance. And we're still meeting the needs of the investors, right? That's the whole goal of our financial reporting. We have external users reporting to meet the needs of these investors, these external users. Okay? And the way we organize our businesses in the US and abroad, they're very similar as well. We're going to have proprietorships, which are just the sole owner, partnerships, and corporations. Very similar throughout the world, what we'll see with these business organizations. Now about the differences? So the difference, one main difference, is that IFRS tends to be a bit simpler with its requirements. So what I mean is that IFRS tends to be more principles-based. We say it's principles-based where they kind of give you, you know, a set of standards, and they're like, you know, here's what we think you should do, and then they give the accountant a little more leeway into making judgments on their own. Where GAAP is more rules-based in the US. Rules-based. Okay? And another term we use for GAAP is that there are bright line standards. What that means when we say bright line standards, is that there are usually very specific numbers that are given in standards that are set. Maybe a very specific threshold like, you know, if this number is above 80%, well then you have to do it this way. If it's below 80%, you do it that way. Where in IFRS, it might not say 80%, it might kind of give you terminology that could give you a little more judgment call of like maybe we account for it this way or account for it a different way, right? So IFRS gives you a little more leeway where GAAP is a bit more strict. And this is one of the key features of the differences between GAAP and IFRS. If you had to guess on a difference between a test and you had to guess which one was GAAP and which one was IFRS. Well, it's most likely that the IFRS rule is going to be a little more judgmental where it gives the accountant a little more freedom in how to do the accounting. Okay? Another main difference here is the Sarbanes Oxley Act. They love to talk about the Sarbanes Oxley Act in your course and we're going to have a video on that later in the course, that we'll talk about it here. So Sarbanes Oxley, this was a result of some accounting scandals that happened in the early 2000s in the US. So these are some laws that were put in place in the US, not internationally, but that basically are more stringent upon public companies. So companies that are traded on stock exchanges, well they have to follow some more strict guidelines on top of GAAP that, makes users more comfortable with the information that's being put out. Okay? And these strict guidelines are only for companies on US exchanges. So this applies more to companies following GAAP, than companies following IFRS. Okay? So it's a little bit more rules that they have to follow. And these are stringent guidelines for auditing and financial statement preparation. Okay? So it puts more rules on the auditors of the financial statements, as well as how we prepare the financial statements, to give to the users. Okay? So the main thing I want to focus on in this video is the difference between IFRS and GAAP. This is the most important part right here. Okay? The principles-based versus rules-based approach of IFRS versus GAAP. But what we're going to see as we go throughout the book is that for the most part, a lot of the accounting is going to be similar and then we'll have specific issues where we're going to have differences between the two. Alright? So with that said, let's go ahead and move on to the next video.
