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IFRS vs US GAAP

Updated on January 3, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between IFRS and US GAAP

The International Accounting and Standards Board (IASB) issues IFRS, whereas GAAP is issued by the Financial Accounting Standards Board (FASB). Though attempts are being made to bring about convergence, it becomes important for an analyst to consider when evaluating different frameworks’ financial statements.

IFRS vs. US GAAP Infographics

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Video Explanation of IFRS vs US GAAP

 

Critical Differences Between IFRS and US GAAP

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Head to Head Comparison

Criteria/ItemMeaningIFRSGAAP
AcronymFull formInternational Financial Reporting StandardsGenerally Accepted Accounting Principles
Issuing bodyAbout standard-setting boardsInternational Accounting Standards Board (IASB)Financial Accounting Standards Board (FASB)
Revenue recognition-Long term contractsIt usually refers to public construction contracts.Revenue will equal the cost.Revenue is considered only under the completed contract methodCompleted Contract MethodThe Completed Contract Method is when the company officials decide to postpone its profit recognition and revenue until they deliver every project. Usually, business organizations adopt such practices when they are doubtful about the recovery of their debts.read more.
Extraordinary itemsIt is unusual and infrequent. Shown net of taxesNet Of TaxesThe term "net of taxes" refers to the amount remaining after deducting taxes. Net of taxes = Gross amount – Tax amountread more below discontinued operationsIFRS prohibits such classificationAllowed under GAAP
Property, Plant, and EquipmentTangible fixed assetsTangible Fixed AssetsTangible assets are assets with significant value and are available in physical form. It means any asset that can be touched and felt could be labeled a tangible one with a long-term valuation.read moreCan be reported using either the cost model or the revaluation modelGAAP does not allow the revaluation model
Investment propertyProperty which is not used in regular operations of the companyPurely and IFRS concept.GAAP does not recognize this category
Intangible assetsThose assets which cannot be seen or touchedReported using cost or revaluation modelGAAP does not allow revaluation model
LIFO (Last In, First Out)Assumes newest goods are sold first, and the oldest goods that were purchased remain so including beginning inventory.Prohibited under IFRSOnly allowed under US GAAP;
Measurement of Inventory ValueCertain revaluation and measurement are required for inventory regularly.Considers lower of cost or net realizable value:Net Realizable Value:Net Realizable Value is a value at which the asset may be sold in the market by the company after deducting the expected cost of selling the asset in the market. It is a crucial metric for determining the value of a company's ending inventory or receivables.read more If there is a subsequent recovery in value, then inventory can be written up;Considers lower of cost or marketLower Of Cost Or MarketLower of cost or market (LCM) is the conservative way through which the inventories are reported in the books of accounts. It states that the inventory at the end of the reporting period is to be recorded at the original cost or the current market price, whichever is lower.read more: No, write up is allowed if there is a recovery in value;
Research and development costsRefers to expenses incurred for research and development to create innovative products and services; Research costs are expenses as incurred, and developmental costs are capitalized;GAAP requires both research and development costs to be expensed as incurred;
Capitalization of interest costsDuring construction, certain costs are capitalized as part of asset costs.Interests in short term lending are offset against capitalized costsCapitalized CostsCapitalization cost is an expense to acquire an asset that the company will use for their business; such costs are recorded in the company's balance sheet at the year-end. These costs are not deducted from the revenue but are depreciated or amortized over time.read more.Such offsets are not allowed under GAAP.;
Component method of depreciationWhere each component is isolated and depreciated separately rather than as a wholeIFRS requires companies to use the component method of depreciationGAAP also allows the component method of depreciation but is seldom used in practice
Revaluation modelIt refers to an alternative method used for periodic valuation and reporting of long-lived assets.IFRS permits the use of either the cost model or the revaluation modelGAAP prohibits the use of the revaluation model
Investment propertyAbout the method of valuationUnder IFRS, Companies are allowed to measure investment propertyInvestment PropertyInvestment property refers to the real estate acquired to earn returns on the investment through rental income, royalties, dividends or future appreciation, usually in the name of an individual investor, a group of investors or an investment company for a short-term or a long-term investment.read more by either using a cost model or fair value accounting model.Under GAAP, Investment properties are measured using the cost model.

Conclusion

Financial reporting tends to provide and facilitate comparison between companies allowing both cross-sectional and time series analysis. The objective of an excellent financial reporting would be to provide sufficient financial information about the reporting entity such that it would tend to be useful for all the potential investors, lenders, stakeholders, creditors, etc. so that it helps them in making decisions about providing the various resources to the entity.

For this reason, standard-setting bodies like International Accounting and Standards Board (IASB) and Financial Accounting Standards Board (FASB) have come into place. They specify that transparency and comprehensiveness are how financial reporting statements are presented through the issuance of their financial reporting frameworksFinancial Reporting FrameworksFinancial reporting is a systematic process of recording and representing a company’s financial data. The reports reflect a firm’s financial health and performance in a given period. Management, investors, shareholders, financiers, government, and regulatory agencies rely on financial reports for decision-making.read more being IFRS and GAAP.

Though there tends to be a significant difference between the treatments of items between the two frameworks, efforts are being made to bring about convergence between the two standards and how financial information is reported. Until then, it becomes crucial for an analyst to be cautious of such differences when attempting to decode and analyze financial reports. Nevertheless, such frameworks do go a long way in having to set up standards in the way the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more get reported

This article has been a guide to IFRS vs. US GAAP. Here, we discuss the top 14 differences between IFRS and US GAAP, infographics, and a comparison table. You may also have a look at the following articles –

Reader Interactions

Comments

  1. Dawson Skool says

    Thanks for simplifying the differences between IFRS and US GAAP. It was easy to understand. Can you tell me why most of the companies are going for IFRS in India?

    • Dheeraj Vaidya says

      Thanks for your note. IFRS offers several benefits over the Indian GAAP. IFRS improves transparency in accounting system, it is globally accepted, and also allows exercise of professional judgment.

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