What is IFRS vs US GAAP?

The IFRS vs US GAAP refers to two accounting standards and principles adhered to by countries in
the world in relation to financial reporting. More than 110 countries follow the International
Financial Reporting Standards (IFRS), which encourages uniformity in preparing financial
statements.

On the other hand, the Generally Accepted Accounting Principles (GAAP) are created by the
Financial Accounting Standards Board to guide public companies in the United States when
compiling their annual financial statements.

Definition of Terms

1. IFRS

The IFRS is a set of standards developed by the International Accounting Standards Board (IASB).
The IFRS governs how companies around the world prepare their financial statements. Unlike the
GAAP, the IFRS does not dictate exactly how the financial statements should be prepared but only
provides guidelines that harmonize the standards and make the accounting process uniform across
the world.
Both individual and corporate investors can analyze a company’s financial statements and make an
informed decision on whether or not to invest in the company. The IFRS is used in the European
Union, South America, and some parts of Asia and Africa.

2. GAAP

The GAAP is a set of principles that companies in the United States must follow when preparing
their annual financial statements. The measures take an authoritative approach to the accounting
process so that there will be minimal or no inconsistency in the financial statements submitted by
public companies to the US Securities and Exchange Commission (SEC). It enables investors to
make cross-comparisons of financial statements of various publicly-traded companies in order to
make an educated decision regarding investments.

Key Differences between IFRS vs. US GAAP

The following are some of the ways in which IFRS and GAAP differ:

1. Treatment of inventory

One of the key differences between these two accounting standards is the accounting method for
inventory costs. Under IFRS, the LIFO (Last in First out) method of calculating inventory is not
allowed. Under the GAAP, either the LIFO or FIFO (First in First out) method can be used to
estimate inventory.

The reason for not using LIFO under the IFRS accounting standard is that it does not show an
accurate inventory flow and may portray lower levels of income than is the actual case. On the
other hand, the flexibility to use either FIFO or LIFO under GAAP allows companies to choose the
most convenient method when valuing inventory.

2. Intangibles

The treatment of developing intangible assets through research and development is also different
between IFRS vs US GAAP standards. Under IFRS, costs in the research phase are expensed as
incurred. Costs in the development phase may be capitalized based on certain factors. On the other
hand, US GAAP generally requires immediate expensing of both research and development
expenditures, although some exceptions exist.

3. Rules vs. Principles

The other distinction between IFRS and GAAP is how they assess the accounting processes – i.e.,
whether they are based on fixed rules or principles that allow some space for interpretations.
Under GAAP, the accounting process is prescribed highly specific rules and procedures, offering
little room for interpretation. The measures are devised as a way of preventing opportunistic
entities from creating exceptions to maximize their profits.

On the contrary, IFRS sets forth principles that companies should follow and interpret to the best of
their judgment. Companies enjoy some leeway to make different interpretations of the same
situation.

4. Recognition of revenue
With regards to how revenue is recognized, IFRS is more general, as compared to GAAP. The latter
starts by determining whether revenue has been realized or earned, and it has specific rules on how
revenue is recognized across multiple industries.

The guiding principle is that revenue is not recognized until the exchange of a good or service has
been completed. Once a good’s been exchanged and the transaction recognized and recorded, the
accountant must then consider the specific rules of the industry in which the business operates.

Conversely, IFRS is based on the principle that revenue is recognized when the value is delivered. It
groups all transactions of revenues into four categories, i.e., the sale of goods, construction
contracts, provision of services, or use of another entity’s assets. Companies using IFRS accounting
standards use the following two methods of recognizing revenues:

 Recognize revenues as the cost that can be recovered during the reporting period

 For contracts, revenue is recognized based on the percentage of the whole contract
completed, the estimated total cost, and the value of the contract. The amount of revenue
recognized should be equal to the percentage of work that has been completed.

5. Classification of liabilities

When preparing financial statements based on the GAAP accounting standards, liabilities are
classified into either current or non-current liabilities, depending on the duration allotted for the
company to repay the debts.

Debts that the company expects to repay within the next 12 months are classified as current
liabilities, while debts whose repayment period exceeds 12 months are classified as long-term
liabilities.

However, there is no plain distinction between liabilities in IFRS, so short-term and long-term
liabilities are grouped together.
 GAAP operates on several key principles:

 Principle of Regularity: The accountant has adhered to GAAP rules and regulations.

 Principle of Consistency: The same standards are applied throughout the financial
reporting process to ensure consistency.

 Principle of Sincerity: The accountant strives to provide an accurate depiction of a

 Principle of Permanence of Methods: Procedures used in financial reporting should be

 Principle of Non-Compensation: All aspects of a business’s performance, both positive

 Principle of Prudence: This emphasizes fact-based financial data representation that is not
clouded by speculation.

 Principle of Continuity: It is assumed that the business will continue to operate in the
foreseeable future.
  Principle of Periodicity: Entries should be distributed across the appropriate periods of
time.

Read our article about Basic Accounting Principles to learn more details about each principle.

GAAP in practice

IASB vs. FASB

GAAP is derived and maintained by the Financial Accounting Standards Board, which is based in the
United States. It is distinctly separate from the International Accounting Standards Board, which
oversees IFRS, and is based in England. The two organizations do not share any management
members, though they meet regularly to discuss the differences in their methodologies.