Chapter 7 - Company Analysis and Valuation of Equity Securities

Question 1

What is the difference between GAAP and IFRS?

Answer 1

GAAP had been the standard for over 75 years in the US and Canada.
Canadian publicly accountable enterprises gave up on GAAP and switched to IFRS (International Financial Reporting Standards) in 2011.
IFRS is almost entirely principles-based while US GAAP is primarily rules-based.

Question 2

How does principles-based accounting differ from rules-based accounting?

Answer 2

Guidelines are more general with principles-based accounting as the goal is to have the completed statements achieve a set of good reporting objectives, such as sufficient disclosure of data.
Rules-based accounting is more rigid, meaning specific procedures are observed when preparing statements. This results in less ambiguity, but also increases complexity as it’s difficult to find rules that fit every situation.