IFRS vs US GAAP

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

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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 rules 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 dividends 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 LIFO (Last In and First Out) is only allowed under GAAP and not under IFRS.
  • A separate head called extraordinary items 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

Criteria/Item Meaning IFRS GAAP
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 method.
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: If there is a subsequent recovery in value, then inventory can be written up; Considers lower of cost or market: 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 costs. 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 property 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 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 frameworks 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 statements get reported

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Comments

  1. AvatarDawson 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 VaidyaDheeraj 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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