Accounting Fundamentals

Financial accounting is the cornerstone of transparency and decision-making in investment markets. To ensure the comparability and consistency of financial statements, different accounting standards and methodologies are used worldwide, including:

• • IFRS (International Financial Reporting Standards)
  • GAAP (Generally Accepted Accounting Principles)
  • NON-GAAP (Non-GAAP Measures)
  • LIFO (Last In, First Out)
  • FIFO (First In, First Out)

Understanding these concepts is essential for investors, analysts, and anyone interested in correctly evaluating a company’s financial performance. This document explores each of these terms, their impact, and key differences.

1.    IFRS (International Financial Reporting Standards)

International Financial Reporting Standards (IFRS) are a set of accounting standards designed to ensure transparency, comparability, and consistency in financial statements worldwide.

The IFRS are issued by the International Accounting Standards Board (IASB) and are used in over 140 countries, including the European Union and many emerging economies.

1.1  Key Characteristics

• • Prioritize a true and fair presentation of financial statements.
  • Principles-based, allowing for professional interpretation.
  • Require fair value measurement of assets and liabilities in certain cases.
  • Applied by companies listed on international stock exchanges.

1.2 Impact on Financial Information

The use of IFRS allows investors to easily compare financial statements of companies from different countries. However, since they are principles-based rather than strict rule-based, there can be some variability in application.

2.    GAAP (Generally Accepted Accounting Principles)

GAAP (Generally Accepted Accounting Principles) are a set of accounting standards primarily used in the United States, issued by the Financial Accounting Standards Board (FASB).

Unlike IFRS, GAAP is more regulatory and specific in its accounting rules.

2.1  Key Characteristics

• Based on detailed and specific rules.
• Emphasize accounting prudence.
• Include strict regulations on revenue and expense recognition.
• Mandatory for companies listed in the U.S.

2.2  Differences Between IFRS and GAAP

Feature	IFRS	GAAP
Based on	Principles	Rules
Applicability	Global	U.S.
Asset valuation	Fair value in some cases	Historical cost more prevalent
Revenue recognition	More flexible	More detailed

2.3  Impact on Financial Information

Companies operating globally may report significantly different financial results depending on whether they use IFRS or GAAP. These differences can influence investors' perceptions of a company’s performance.

3.    NON-GAAP (Non-GAAP Measures)

NON-GAAP measures are adjusted financial metrics that companies use to present their performance more accurately according to their criteria. These measures exclude certain accounting elements that could distort the perception of financial results.

Examples of NON-GAAP Measures

• EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
• Adjusted earnings, excluding extraordinary events
• Adjusted cash flow

3.1  Impact on Financial Information

While NON-GAAP measures can provide a clearer view of operational profitability, they can also be used to manipulate financial results and present a more favorable image of the company. Therefore, investors should analyze them cautiously.

4.    LIFO and FIFO: Inventory Valuation Methods

LIFO and FIFO are inventory accounting methods that affect how the cost of goods sold (COGS) and ending inventory are recorded.

• LIFO (Last In, First Out): The last inventory acquired is the first to be sold.
• FIFO (First In, First Out): The first inventory acquired is the first to be sold.

4.1  Key Differences Between LIFO and FIFO

Feature	LIFO	FIFO
COGS	Higher in inflation periods	Lower in inflation periods
Ending inventory	Lower in inflation	Higher in inflation
Tax impact	Reduces taxes in inflation	Increases taxes in inflation
Acceptability	Not allowed under IFRS	Allowed under IFRS and GAAP

4.2  Impact on Financial Information

In an inflationary environment, LIFO results in lower accounting profits, reducing tax liability. In contrast, FIFO shows higher accounting profits, but may lead to higher taxes.

5.    Conclusion

Understanding IFRS, GAAP, NON-GAAP, LIFO, and FIFO is essential for correctly interpreting financial statements and evaluating a company’s true financial condition.

• IFRS vs. GAAP: Investors must be aware of the differences between these accounting standards when analyzing global companies.
• NON-GAAP Measures: Should be carefully evaluated to avoid misleading financial results.
• LIFO vs. FIFO: The choice of inventory accounting method significantly impacts a company’s profitability and tax obligations.

A solid understanding of these accounting fundamentals allows investors and analysts to make informed financial decisions.