IFRS VS GAAP:

Accounting students and professionals are always keen to learn the differences between the two primary sets of accounting principles and standards. We call them IFRS and GAAP. Let’s proceed to the discussion with an understanding of IFRS VS GAAP.

The IFRS stands for International financial reporting standards. It is a set of standards issued by the International Accounting Standards Board (IASB). While GAAP, also known as US GAAP, stands for generally accepted accounting principles. GAAP is established by the Financial Accounting standard board(FASB).

It depends on whether your business is working in the US or abroad to determine which set of standards to use. While there are many similarities between IFRS and GAAP, still there are several differences that we would discuss in this post.

Differences between IFRS and GAAP

1-Global VS Local

IFRS is adopted globally by more than 120 countries around the world, including the EU and many Asian, and South American countries. On the other hand, GAAP is adopted mostly by US companies, and by some companies in Japan and the rest of the world. GAAP varies from country to country because each country has its own legal and regulatory system. For example, there is a US GAAP, etc

2-Principle-based VS Rule-based

IFRS is principle-based while GAAP tends to be more rules-based. Companies under IFRS follow the principles that require interpretations and analysis to determine how they are to be applied in a given situation. On the other side, Companies under GAAP follow industry-specific rules and guidelines.

3-Fair value VS Historical cost

IFRS is based more on fair value accounting and less on historical cost. However, companies under GAAP rely more on the historical cost approach than the fair-value approach.

Under IFRS, revaluation of assets such as inventories, property, plant & equipment, intangible assets, and investments in marketable securities is permitted using fair values. However, revaluation is not permitted under GAAP except for marketable securities.

4- Intangibles 

Under IFRS, intangible assets are only recognized when it is certain that the future economic benefit will flow to the entity. However, GAAP recognizes intangible assets at their current fair market value without any additional future considerations.

5-Statement of financial position 

Companies under IFRS present statement of financial position information under the reverse order of liquidity:

•  Non-current assets
•  Current assets
•  Equity
•  Non-current liabilities
•  Current liabilities

While companies that follow GAAP present the statement of financial position information in the order of liquidity:

• Current assets
• Non-current assets
• Current liabilities
• Non-current liabilities
• Equity

6-Income statement 

Under GAAP, companies follow either a single-step or multiple-step format when presenting income statements. However, IFRS does not mention a single-step or multiple-step approach. In other words, Under IFRS there is no specific format for income statements while GAAP prescribes a specific-format either a single-step format or multi-step.

7- Statement of cash flow

As per IFRS, non-cash investing and financing activities should be disclosed in the notes to the financial statements instead of financial statements. Under GAAP, companies might present this information on the face of the statement of cash flows.

Let’s understand all the differences through this table. It indicates the differences between the two approaches.

8- Contingent liabilities

As per IFRS, contingent liabilities refer to possible obligations that are not recognized in the financial statements but may be disclosed if certain conditions are met. However, under GAAP, some contingent liabilities are recorded in the financial statements, others are disclosed, and in some cases, no disclosure is required.

9- Company Accounting

There are many differences in the terminology of the equity accounts. Here is a summary of some of the common differences in terms of corporation related terminology.

10- Inventory valuation approaches 

IFRS only allows to use of FIFO(First in-First 0ut) and weighted average cost method, however, it does not permit to use of LIFO(Last in-First out). On the other hand, GAAP provides more detailed guidelines for inventory accounting. In the case of GAAP, either the LIFO, FIFO, or weighted average cost method can be used for inventory valuation.

The reason why LIFO is not used as per IFRS is that it does not display an exact inventory flow and it may also result in artificially low net income.