Difference Between
GAAP and IFRS
In the world of accounting, there are two different standards of financial
reporting. International Financial Reporting Standards (IFRS) and Generally
Accepted Accounting Principles (GAAP). IFRS is the most widely used system
in the world, with over 110 countries using this method of accounting for
publicly traded companies. The United States of America is the only country
that is yet to make the switch to this method of reporting.
GAAP vs IFRS is the most debatable topic in accounting where the former is
defined as the financial reporting method having universal applicability while
the latter are the set of guidelines made for financial accounting. As an
account professional or business owner, it is vital to know the variations of
these accounting methods, in order to successfully manage your company
globally, as well as domestically.
Top 10 key differences between IFRS and GAAP
accounting:
1. Adoption
IFRS is a globally adopted method for accounting, while GAAP is exclusively
used within the United States.
2. Methodology
GAAP focuses on research and is rule-based, whereas IFRS looks at the
overall patterns and is based on principle.
3. Developed by
The principles of IFRS are issued by the International Accounting Standard
Board (IASB), while GAAP are issued by Financial Accounting Standard
Board (FASB)
4. Inventory Methods
GAAP uses the Last In, First Out (LIFO) method for inventory estimates.
However, in IFRS, the LIFO method for inventory is not allowed.
5. Inventory Reversal
IFRS and GAAP accounting also differ when it comes to inventory write-down
reversals. In GAAP, the amount of the write-down cannot be reversed.
However, under IFRS, the amount of the write-down can be reversed.
6. Income Statements
Extraordinary or unusual items are included in the income statement and not
segregated under IFRS. While, under GAAP, they are separated and shown
below the net income portion of the income statement.
7. Intangible Assets
When it comes to intangible assets, IFRS takes into account whether an asset
will have a future economic benefit as a way of assessing the value. Intangible
assets measured under GAAP are recognized at the fair market value and
nothing more.
8. Fixed Assets
In fixed assets, companies using GAAP accounting must value these assets
using the cost model. IFRS uses a different model for fixed assets called the
revaluation model.
9. Development Costs
Development costs can be capitalized under IFRS, as long as certain criteria
are met. With GAAP, development costs are not allowed to be capitalized.
10. Quality Characteristics
Finally, the qualitative characteristics of how the accounting methods function.
GAAP uses a hierarchy of characteristics, such as relevance, reliability,
comparability and understandability, to make informed decisions based on
user-specific circumstances. IFRS also works with the same characteristics,
except that decisions cannot be made based on an individual’s specific
circumstances.
The value of accounting knowledge
Understanding these key differences between IFRS and GAAP accounting is
important so your company can accurately do business internationally. You
can improve your understanding of these accounting standards by taking an
online course so that you can examine financial statements more effectively
and learn more about your company’s performance.
Join an MBA in Accounting and Finance program to understand explicit
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