GAAP vs. IFRS

GAAP (US Generally Accepted Accounting Principles) is the accounting standard used in the US, while IFRS (International Financial Reporting Standards) is the accounting standard used in over 110 countries around the world. GAAP is considered a more “rules based” system of accounting, while IFRS is more “principles based.” The U.S. Securities and Exchange Commission is looking to switch to IFRS by 2015.

What follows is an overview of the differences between the accounting frameworks used by GAAP and IFRS. This is at a broad, framework level; differences in accounting treatments for individual cases may also be added as this gets updated.

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GAAP

IFRS

Stands for Generally Accepted Accounting Principles International Financial Reporting Standards
Introduction (from Wikipedia) Generally accepted accounting principles (GAAP) refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards or standard accounting practice. International Financial Reporting Standards are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries.
Used in United States Over 110 countries, including those in the European Union
Performance elements Revenue or expenses, assets or liabilities, gains, losses, comprehensive income Revenue or expenses, assets or liabilities
Required documents in financial statements Balance sheet, income statement, statement of comprehensive income, changes in equity, cash flow statement, footnotes Balance sheet, income statement, changes in equity, cash flow statement, footnotes
Inventory Estimates Last-in, first-out, first-in, first-out or weighted-average cost First-in, first-out or weighted-average cost
Inventory Reversal Prohibited Permitted under certain criteria
Purpose of the framework US GAAP (or FASB) framework has no provision that expressly requires management to consider the framework in the absence of a standard or interpretation for an issue. Under IFRS, company management is expressly required to consider the framework if there is no standard or interpretation for an issue.
Objectives of financial statements In general, broad focus to provide relevant info to a wide range of stakeholders. GAAP provides separate objectives for business and non-business entities. In general, broad focus to provide relevant info to a wide range of stakeholders. IFRS provides the same set of objectives for business and non-business entities.
Underlying assumptions The "going concern" assumption is not well-developed in the US GAAP framework. IFRS gives prominence to underlying assumptions such as accrual and going concern.
Qualitative characteristics Relevance, reliability, comparability and understandability. GAAP establishes a hierarchy of these characteristics. Relevance and reliability are primary qualities. Comparability is secondary. Understandability is treated as a user-specific quality. Relevance, reliability, comparability and understandability. The IASB framework (IFRS) states that its decision cannot be based upon specific circumstances of individual users.
Definition of an asset The US GAAP framework defines an asset as a future economic benefit. The IFRS framework defines an asset as a resource from which future economic benefit will flow to the company.

Contents: GAAP vs IFRS

edit Objectives of Financial Statements

Both GAAP and IFRS aim to provide relevant information to a wide range of users. However, GAAP provides separate objectives for business entities and non-business entities, while the IFRS only has one objective for all types of entities.

edit Presentation of Earnings

GAAP emphasizes smooth earning results from year to year, giving investors a view of normalized results. Taxes, for example, are reported based on statutory rates, not on what the company actually paid. They are designed to help investors understand average capital spending and taxation for the company.

edit Documents

GAAP requires financial statements to include a balance sheet, income statement, statement of comprehensive income, changes in equity, cash flow statement, and footnotes. It is recommended that the balance sheet separates current and noncurrent assets and liabilities, and deferred taxes are included with assets and liabilities. Minority interests are included in liabilities as a separate line item.

IFRS requires financial statements to include a balance sheet, income statement, changes in equity, cash flow statement, and footnotes. The separation of current and noncurrent assets and liabilities is required, and deferred taxes must be shown as a separate line item on the balance sheet. Minority interests are included in equity as a separate line item.

edit Disclosure

Under GAAP, companies are required to disclose information about their accounting choices and their expenses in footnotes.

edit Intangibles

In GAAP, acquired intangible assets (like R&D and advertising costs) are recognized at fair value, while in IFRS, they are only recognized if the asset will have a future economic benefit and has a measured reliability.

edit Accounting for Assets

US GAAP defines an asset as a future economic benefit, while under IFRS, an asset is a resource from which economic benefit is expected to flow.

edit Fixed Assets

Under US GAAP, fixed assets such as property, plant and equipment are valued using the cost model i.e., the historical value of the asset less any accumulated depreciation. IFRS allows another model - the revaluation model - which is based on fair value on the date of evaluation, less any subsequent accumulated depreciation and impairment losses.

This is a great video comparing the treatment of fixed assets under IFRS and GAAP.

edit Underlying Assumptions

Under the IASB framework (IFRS), underlying assumptions such as accrual and going concern are given more importance. The concept of going concern, especially, is more well-developed in IFRS compared with US GAAP.

edit How IFRS impacts US companies

While U.S. companies use GAAP and do not directly use IFRS for their SEC filings, IFRS nevertheless impacts them. For example, in cases of global mergers and acquisitions, when they have non-US subsidiaries or non-US stakeholders like investors, customers or vendors. In several such instances, U.S. companies may be required to provide financial information in line with IFRS standards.

The looming transition from GAAP to IFRS will also be challenging for several U.S. companies.

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"GAAP vs IFRS." Diffen.com. Diffen LLC, n.d. Web. 31 Jul 2014. < http://www.diffen.com/difference/GAAP_vs_IFRS >

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Comments: GAAP vs IFRS

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Anonymous comments (1)

September 17, 2013, 9:21am

'GAAP' should be 'US GAAP'. IFRS is also a form of GAAP. And then there is German GAAP, French GAAP, Mexican GAAP. So calling 'US GAAP' 'GAAP' is a bit US-centric.

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