GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards) are two key regulatory requirements related to financial reporting.
Reporting is one of the fundamental functions of a finance team, but not all reports are created equal.
That’s not a snub, either. It’s by design. Financial reporting has different requirements than management reporting, just like tax accounting and auditing have their own forms and functions too. Each has unique uses and applications, and some (ahem, financial reporting), have very specific guidelines.
GAAP and IFRS are regulatory requirements and standards that can make financial reporting more time consuming and complicated than its counterparts, often taking attention away from your other reporting needs. More specifically, keeping up with the reporting you do for investors, banks, creditors and regulatory bodies can make it difficult to find the time you need to focus on the management reporting that will help you better understand your organization’s internal requirements.
Let's explore both requirements, and learn how to better balance your financial and management reporting needs, let’s look at each in turn—as well as how GAAP and IFRS factor in, considering the following:
What Is GAAP?
In the U.S., the Generally Accepted Accounting Principles (GAAP, or U.S. GAAP) is the standard set of rules for financial reporting. GAAP is adhered to by the SEC and issued by the Financial Accounting Standards Board (FASB). GAAP covers topics such as retained earnings, revenue recognition, financial statement presentation, balance sheet classification, liabilities, foreign currency, transactions and so on.
What is IFRS?
The International Financial Reporting Standards (IFRS) outline the accounting principles put out by the IFRS Foundation and International Accounting Standards Board (IASB). They’re currently used in over 140 countries worldwide, including the European Union—establishing a common language and standardized definitions across countries and continents. IFRS covers topics such as the presentation of financial statements, revenue recognition, employee benefits, fixed and intangible assets, etc.
What Are The Differences Between GAAP and IFRS?
The standards you adhere to will differ depending on where your company is listed and where your stakeholders operate—but that’s not the only thing that’s different about them.
- Is rules based, GAAP principles leave less room for interpretation
- GAAP allows for LIFO (last-in, first out) inventory accounting methods
- GAAP does not allow for inventory reversals
- Is principles based, IFRS leaves door open for more interpretation when compared with GAAP
- IFRS does not allow for LIFO
- IFRS allows inventory reversals under specific conditions
As well as some differences, there are also similarities. Both allow for the the first-in, first-out inventory accounting method, and the weighted average cost method.
Organizations working across borders, or handling international mergers and acquisitions, may be required to keep up with both GAAP and IFRS, so a knowledge of each—and the similarities and differences between them—is critical. Whether you’re keeping up with either or both, it can be detailed and time-consuming, as you must be careful to format your statements appropriately and make each calculation according to the specific guidelines.
Maintaining Your Financial Reporting Needs
While there’s a lot your team can learn from your financial reporting that will help drive long-term strategy and performance, the most regulated of that reporting is specifically designed for external use. Through a standard reporting language, investors, creditors and bodies such as the US Securities and Exchange Commission (SEC) can discern the health and performance of your company and compare your financial results against other organizations and market norms.
In addition to any applicable reporting requirements set by industry-specific agencies, the main standards your financial reports follow will depend on the set of ruling principles you’re applying: GAAP or IFRS. Like all accounting standards, reporting requirements under GAAP versus IFRS are designed to offer a set of general rules and guidelines for reporting. They also make sure everyone is working by a standard set of methods and definitions no matter what industry you’re working in.
Their goal is to make sure nothing is missed, everything from commission tracking to variances in budget vs actuals. Your financial statements should be consistent, comprehensive and comparable. Standards like these maintain transparency and ensure that investors and creditors have all of the information they need in a format they can easily understand.
Prioritizing Management Reporting
Management reporting, on the other hand, isn’t regulated in the same way. That’s because, for the most part, your management reports are used internally, for everything from day-to-day operations to Board of Directors reporting. You’re able to report in a way that best meets your business needs and aligns with the external explanations of how your business runs. And since your audience is also internal, you can organize your information around them.
This means you can include forecasting or predictive data, segment down to different parts of the business or departments and incorporate an operational view for a fuller, more integrated, picture of your business. And while financial reporting can offer internal insights of its own, it’s the information in your management reports that will drive your organizational decisions and help you see whether you’re meeting your business goals.
All of which is proof that management reporting is just as critical to your organizational success as financial reporting. In fact, they often work best in tandem, with a second internal view of your financial reporting that’s not for regulators. That view can be more aligned with your organizational structure or a click down from the high-level reporting that you send out. There, operational metrics may be woven in for more of a data-driven storytelling approach, with your management reporting a click or several clicks further down, providing details on KPIs and a deeper dive into your operational numbers for sales, HR, marketing and so on.
But even so, when your team’s time is tight and the regulatory needs of GAAP and IFRS prioritized, they can start to take focus from your management reporting needs. So how do you find the right balance between the two, to keep up with GAAP and IFRS while still staying on track with your internal reporting requirements?
Finding the Right Balance
You want your finance team to have the time to analyze your business while still meeting the reporting and governance requirements of any external guidelines or entities—whether that’s GAAP or IFRS, the SEC, banks or any outside bodies specific to your industry. To accomplish that, start by considering your people, process and technology:
Allocate your team accordingly
Traditionally, financial reporting has been the realm of more senior, or at least higher paid, team members, because it does require a certain amount of regulatory knowledge. But since your management reporting is directly tied to your strategy and business goals, it’s imperative in helping to move your organization forward. As such, it may also require executive or a senior member’s involvement, depending on finance’s role in strategy within your organization.
So don’t put all of your senior finance team members into one financial reporting-sized basket. Rather, to effectively and efficiently execute both your financial and management reports, treat your reporting like a team sport—allocating senior and junior team members according to their different skill sets. Consider those with technical accounting skills and regulatory knowledge, those who have an understanding of how your organizational data rolls up, team members who can prepare and book journal entries and make sure bills are properly coded, and those who can check and validate numbers and build controls. Then assign those team members as needed, leaving senior leaders to tie your reporting to the organization's strategies and goals.
Build a standard process
Create a process that draws data in a uniform way and takes advantage of automation wherever possible. Your processes should also be designed around your goals and timelines so that you’re able to keep on track with your objectives on both the financial and management reporting fronts. Ensure you have the right checks and balances in place as well, especially when it comes to meeting your financial reporting needs. Finally, the right financial and regulatory reporting processes will self-identify errors and make it easy to retrieve the needed data and to build proper documentation and support practices—giving your team the space to concentrate on other things.
Find the right technology
The right technology will help you automate where possible, ensure data consistency and quality, and keep your reporting running smoothly across the board, facilitating team collaboration and mitigating error. A multidimensional database will also help you bridge your different reporting requirements, rolling up the details you access in a variety of ways depending on your required output and the insights you’re after.
It can be a balancing act to keep up, on a timely basis, with the requirements of GAAP and IFRS and the needs of the external bodies, investors and banks that use them and expect the consistency they bring—all while still prioritizing your internal reporting needs. Especially when new guidelines can be added that require you to go back to your prior reporting and recalculate or roll up data based on newly introduced methodologies—which can be a reality when working with guidelines like these. But the right mix of people, process and tools can help achieve that balance—and ensure you’ve got the information you need to make the right decisions internally while still keeping up with your external reporting needs.