Alright. Now let's see the difference between GAAP and IFRS when we're doing the record keeping in our books. Let's explore some of the main differences and similarities. So remember, when we talk about GAAP, the Generally Accepted Accounting Principles, these are the rules in the US. This is what we're focused on for the most part in this course and they're set by the Financial Accounting Standards Board (FASB). FASB creates GAAP. Internationally, we have the International Accounting Standards Board, which creates IFRS (International Financial Reporting Standards). Mostly in this course, we're focused on GAAP, but it's beneficial to discuss the differences as well.
Now we're focused on the record-keeping process as we saw in this chapter, right? This one's not too complicated because for the most part, they're the same. The basic techniques for recording are the same. We're going to have our journal entry system with our debits and credits. And again, just like we've seen when we review financial statements or we've made a trial balance, they only use the dollar sign or maybe the euro sign, whatever it might be. They're only going to show it on the trial balance and the financial statements. When doing journal entries with debits and credits, you don’t usually use dollar signs because you're going to be using only one unit of measure, right? That's the unit of measure principle: that we're going to have a unit, such as the dollar or the euro, that we use consistently throughout our books.
The trial balances follow the same format. When we create our trial balance, we list all our assets, liabilities, and equity and we show their balances to make sure that everything is listed properly. We do our adjustments just the same to get to our adjusted trial balance and create our financial statements. One of the main differences, which we've talked about before, is that IFRS uses the fair value principle more often. They are much more lenient about using the fair value principle, which allows you to change the value of your assets based on their current market value. Compare that to the historical cost principle that GAAP mostly focuses on, which says that the cost we paid is the value that we will keep on our balance sheet. We don't update it for changes in the market value, changes in the value of the asset over time. We leave it at that historical cost because it values consistency. We want to keep that consistency; we don't want random fluctuations from the change in value. Whereas IFRS is a little more lenient and lets you use the fair value principle. There are pros and cons for each of them. While the historical cost principle has consistency, the fair value principle gives more up-to-date information because it reflects market values closer to the date of the report. GAAP still uses the fair value principle, but generally, it only uses it for short-term investments. It'll update the value of those short-term investments because, for the most part, there's readily available information about their value. However, IFRS allows it for all assets, including long-term assets like property, plant, and equipment, such as land and fixed assets. You can update those using the fair value principle; you just have to be consistent in using it. You can't just use it when it benefits you, but not when it hurts you. You just have to be consistent. That's one of the main differences between GAAP and IFRS regarding the use of the fair value principle.
Alright. Let's go ahead and move on to the next video.
