Difference Between IFRS and US GAAP
IFRS is issued by the International Accounting and Standards Board (IASB) 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 be considerate when evaluating financial statements under the different frameworks
IFRS vs. US GAAP Infographics
Critical Differences Between IFRS and US GAAP
- IFRS tends to be a globally accepted standard for accounting with usage in more than 110 countries whereas US GAAP tends to be used within the United States and usually does have a different set of accounting rulesAccounting RulesAccounting rules are guidelines to follow for registering daily transactions in the entity book through the double-entry system. Here, every transaction must have at least 2 accounts (same amount), with one being debited & the other being credited. than for the rest of the world
- GAAP generally focuses on research and is considered rule-based whereas IFRS focuses on the holistic pattern and deem to base on the principle
- One can also note that liabilities are segregated as current and non-current liabilities under GAAP, whereas IFRS warrants no such segregation.
- Under GAAP, the following items classify as operating expenses: Interest received and paid, dividends received and paid. However, under IFRS, interest received and dividendsDividendsDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company. received may be under the category of either operating or investing, whereas interests and dividends paid may be either operating or financing.
- Under IFRS, it would be possible for a company to consider an equity method as ‘held for sale’ whereas such classification would not be possible under GAAP.
- There are also differences when it comes to measuring properties. IFRS reports properties either using cost or revaluation model, whereas GAAP prohibits the usage of the revaluation model. Even the method of LIFOMethod Of LIFOLIFO (Last In First Out) is one accounting method for inventory valuation on the balance sheet. LIFO accounting means inventory acquired at last would be used up or sold first. (Last In and First Out) is only allowed under GAAP and not under IFRS.
- A separate head called extraordinary itemsExtraordinary ItemsExtraordinary Items refer to those events which are considered to be unusual by the company as they are infrequent in nature. The gains or losses arising out of these items are disclosed separately in the financial statement of the company. is allowed in income statement only under the GAAP framework, whereas IFRS does not consider such existence of the item.
- When it comes to research and development, under IFRS, research costs are expensed, whereas development costs are capitalized. In the case of GAAP, both research and development costs to are capitalized.
Head to Head Comparison
|Acronym||Full form||International Financial Reporting Standards||Generally Accepted Accounting Principles|
|Issuing body||About standard-setting boards||International Accounting Standards Board (IASB)||Financial Accounting Standards Board (FASB)|
|Revenue recognition-Long term contracts||It 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..|
|Extraordinary items||It is unusual and infrequent. Shown net of taxes below discontinued operations||IFRS prohibits such classification||Allowed under GAAP|
|Property, Plant, and Equipment||Tangible fixed assets||Can be reported using either the cost model or the revaluation model||GAAP does not allow the revaluation model|
|Investment property||Property which is not used in regular operations of the company||Purely and IFRS concept.||GAAP does not recognize this category|
|Intangible assets||Those assets which cannot be seen or touched||Reported using cost or revaluation model||GAAP 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 IFRS||Only allowed under US GAAP;|
|Measurement of Inventory Value||Certain 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. 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.: No, write up is allowed if there is a recovery in value;|
|Research and development costs||Refers 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 costs||During 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..||Such offsets are not allowed under GAAP.;|
|Component method of depreciation||Where each component is isolated and depreciated separately rather than as a whole||IFRS requires companies to use the component method of depreciation||GAAP also allows the component method of depreciation but is seldom used in practice|
|Revaluation model||It 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 model||GAAP prohibits the use of the revaluation model|
|Investment property||About the method of valuation||Under 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. by either using a cost model or fair value accounting model.||Under GAAP, Investment properties are measured using the cost model.|
Financial reporting tends to provide and facilitate comparison between companies allowing both cross-sectional and also 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.
It is for this reason that standard-setting bodies like International Accounting and Standards Board (IASB) and Financial Accounting Standards Board (FASB) have come in place. They specify that transparency and comprehensiveness be in the manner that financial reporting statements are presented through the issuance of their financial reporting frameworksFinancial Reporting FrameworksFinancial Reporting is the process of disclosing all the relevant financial information of a business for a particular accounting period. These reports are used by the stakeholders (investors, creditors/ bankers, public, regulatory agencies, and government) to make investing and other relevant decisions. 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 he/she attempts to decode and analyze the 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. get reported
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