Introduction

The success of your business is determined by how well you manage your money. As a basic rule of thumb, you should always aim to increase your revenues and reduce your expenses. However, it is easier said than done. Financial management success is determined by the accounting principles you adhere to. Generally, there are two set of guidelines: Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). Although it seems as if it’s a battle between gaap vs ifrs, both sets of guidelines can help your business. You just have to know that if you decide to go for one set of guidelines, you cannot use the other since both are governed by different organizations.

Accounting Standards

GAAP

  1. Honesty

You should always make sure that what is presented in the books of accounts is an accurate presentation of the firm’s financial situation. If you made a loss, make sure that it clearly shows on the profit and loss statement. The work of an accountant is to interpret the numbers as they are, not to manipulate them to suit the investors or shareholders.

  1. Consistency

The accountant should follow the same guidelines and methods to balance the company’s books of accounts every financial year. For example, if he or she used straight line method to calculate depreciation in previous years, they should not use declining balance method this year. Your accountant should always maintain a level of consistency. If they used a different method, they should give a reasonable explanation for doing so.

  1. Prudence

You should not ‘sugar coat’ transactions. Always show the figures as they are. Make sure that your accountant records a revenue after he or she has confirmed that there was actual money that came into the business. Alternatively, an expense should only be recorded after it has been confirmed and is considered probable.

IFRS

  1. Share-Based Payment

If your company intends to go public, you are required under the IFRS standards to acknowledge share-based transactions in your financial statements. For example, if your company issues shares to creditors because you failed to pay them back, you should include that in the financial statements. Another example of a share-based transaction is whereby you offer employees shares as a reward for their efforts.

  1. Business Combination

In the event that you acquire another business, you are required to disclose all the relevant details of that transaction. For example, before you buy the business, make sure that you are getting it at a fair value. You should account for all assets and liabilities acquired through the acquisition so that your shareholders are not surprised by an expense from the new business.

  1. Financial Instruments Disclosure

You are required to disclose the extent to which financial instruments affect your business. There are some entities that do business with you and only use specific financial instruments such as cash, accounts receivable, and accounts payable. Accounts receivables can be risky especially if the entity defaults. The management should also disclose how it intends to handle those risks in their financial report.

Conclusion

These accounting standards were created to guide bookkeepers and minimize errors when balancing books of accounts. The integrity and financial soundness of your business is determined by how well you adhere to these principles. Whether you decide to follow gaap or ifrs, the decision is up to you. However, if you are just starting out and don’t want to complicate things, stick to gaap.

 

by: Dennis Hung