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 preparation of 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.

1. IFRS
The IFRS is a set of standards developed by the International Accounting
Standards Board (IASB). The IFRS govern 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 the financial statements
of a company and make an informed decision on whether or not to invest in
the company. The IFRS are used in the European Union, South America, and
in 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). This
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, while under the GAAP,
either the LIFO or FIFO (First in First out) method can be used for estimating
inventory.

The reason for not using LIFO under the IFRS accounting standard is because
it does not show an accurate flow of inventory 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 method that
is most convenient when valuing inventory.

 
2. Intangibles
The treatment of intangible assets such as research and goodwill also
feature when differentiating between IFRS vs US GAAP standards. Under
IFRS, intangible assets are only recognized if they will have a future
economic benefit. In such a way, the asset can be assessed and given a
monetary value. GAAP, on the other hand, recognizes intangible assets at
their current fair market value and no additional (future) considerations are
made.

3. Rules vs. Principles

The other distinction between IFRS and GAAP is in 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 with the goal of
maximizing 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 has 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 that has been 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 exceed
12 months are classified as long-term liabilities.

However, in IFRS, there is no plain distinction between liabilities, so short-

term and long-term liabilities are grouped together.