GAAP vs. IFRS: Stockholders' Equity - Online Tutor, Practice Problems & Exam Prep

GAAP and IFRS both address stockholders' equity similarly in areas like record keeping, prior period adjustments, and earnings per share calculations. However, key differences exist, such as IFRS's use of "reserves" for non-paid-in capital and the treatment of revaluation accounts for long-term assets. Terminology also varies slightly, with terms like "stockholders" in GAAP and "shareholders" in IFRS. Understanding these distinctions is crucial for navigating financial statements and ensuring compliance with accounting standards.

GAAP vs. IFRS: Stockholders' Equity

All right, let's discuss some of the key differences between GAAP and IFRS when it comes to stockholders' equity. So remember GAAP, that's what we've been focusing on in this course, the generally accepted accounting principles, and those are the rules here in the US. So FASB, the Financial Accounting Standards Board, they create GAAP. Compare that to the international standards which are created by the International Accounting Standards Board; they create the international standards called IFRS, IFRS. Okay?

So let's go ahead and look at some of the key similarities and differences when it comes to stockholders' equity. The similarities, well, the record keeping. When we issue shares of equity, we repurchase shares into treasury stock, that's pretty much the same exact calculation, the same journal entries we're going to be making. And when we do prior period adjustments, so if there was some error that we found in a prior period, well that goes through retained earnings. And if we're going to have a change in accounting principle, say we used to use the weighted average method for inventory and now we're going to change to the FIFO method. Well, if we're changing an accounting principle like that, we need to change retroactively. We need to change previous years to make it seem like we are using the same calculation all along. Okay? And we're going to handle those the same from a GAAP perspective or IFRS perspective. Now those calculations are pretty much beyond the scope of this class. You'll probably do that in your next accounting class, but for now, it's just good to know that those prior period adjustments, they're the same from GAAP and IFRS. The way we calculate earnings per share, our EPS calculations, remember we did EPS? Well, that's going to be the same from GAAP and IFRS as well. And lastly, the Statement of Comprehensive Income. Remember, our income statement shows our net income. So comprehensive income, this is another thing that's pretty much beyond the scope of this class, but it's going to equal your net income plus what I like to call stuff. There's going to be some weird things that come up and we'll talk about one of them right now, but it's a little more abstract, a little more complicated topics in accountings that get put into this comprehensive income category, not into our net income, okay?

So let's check out some of these key differences. One of them is this term reserves that IFRS uses. So they use reserves for everything that's not paid in capital. Remember, paid in capital, that's our common stock, our additional paid in capital, APIC and less any treasury stock, and we'll also have preferred stock sometimes, right? So that's our paid in capital, everything else is reserves which is our retained earnings and then with IFRS we've got some other general reserves that come up here and there like our revaluation accounts. So remember we've talked about this before when we talked about IFRS: the revaluation of long-term assets. That's this third bullet right here. So remember, we were revaluating our long-term assets, well, those revaluations, they end up in these revaluation accounts in our reserves, okay?

The last thing here is these terminology differences. I got a list of them below, but for the most part, they kinda mean the same thing, and you can see how for the most part, GAAP and IFRS are just some differences in the wording that they use. Okay? So we're not going to go through them all. I kind of have them all side by side here and don't get caught up memorizing these differences, it's just so you're aware that there are these differences. And for the most part, you can see that they're pretty much the same, right? Stockholders versus shareholders, things like that. Very small differences in terminology. Alright? So that's about it when it comes to stockholders' equity. Let's go ahead and move on to the next video.

Here’s what students ask on this topic:

What are the key differences between GAAP and IFRS in terms of stockholders' equity?

GAAP and IFRS handle stockholders' equity similarly in many respects, such as record keeping, prior period adjustments, and earnings per share calculations. However, key differences include IFRS's use of 'reserves' for non-paid-in capital items, which encompasses retained earnings and revaluation accounts for long-term assets. GAAP does not use the term 'reserves' in this context. Additionally, terminology varies slightly, with GAAP using 'stockholders' and IFRS using 'shareholders'. Understanding these distinctions is crucial for accurate financial reporting and compliance with respective accounting standards.

How do GAAP and IFRS handle prior period adjustments in stockholders' equity?

Both GAAP and IFRS handle prior period adjustments similarly. If an error is discovered in a prior period, it is corrected through retained earnings. This ensures that the financial statements reflect the correction as if the error had never occurred. Additionally, if there is a change in accounting principle, such as switching from the weighted average method to the FIFO method for inventory, previous years' financial statements must be adjusted retroactively to maintain consistency. This approach ensures comparability and accuracy in financial reporting.

What is the role of 'reserves' in IFRS stockholders' equity?

In IFRS, 'reserves' refer to all components of stockholders' equity that are not paid-in capital. This includes retained earnings and other specific reserves like revaluation accounts for long-term assets. These revaluation accounts capture changes in the value of assets over time. The use of reserves helps in categorizing different equity components more distinctly, providing a clearer picture of a company's financial health. Understanding these reserves is essential for accurate financial analysis and reporting under IFRS.

How do GAAP and IFRS differ in their terminology for stockholders' equity?

GAAP and IFRS use slightly different terminology for stockholders' equity. For instance, GAAP uses the term 'stockholders' while IFRS uses 'shareholders'. Additionally, IFRS uses 'reserves' to describe non-paid-in capital items, whereas GAAP does not. These differences in terminology can sometimes cause confusion, but they generally refer to similar concepts. Being aware of these variations is important for interpreting financial statements accurately, especially when dealing with international financial reports.

How do GAAP and IFRS treat the revaluation of long-term assets in stockholders' equity?

Under IFRS, the revaluation of long-term assets is recorded in revaluation accounts within the reserves section of stockholders' equity. This allows companies to reflect the fair value of their assets more accurately. GAAP, on the other hand, generally does not allow for the revaluation of long-term assets; assets are typically recorded at historical cost. This difference can lead to significant variations in the reported value of stockholders' equity between companies using GAAP and those using IFRS.