In accounting, there are two standards of financial reporting: IFRS and GAAP. However, these financial reporting standards differ in various ways, making it necessary for accounting professionals to have a robust understanding of both IFRS and GAAP.
Find out everything you need to know about IFRS vs. GAAP, including the key points of difference and the potential for the future convergence of the IFRS and GAAP accounting standards.
What is IFRS?
IFRS stands for International Financial Reporting Standards. Developed by the International Accounting Standards Board (IASB), IFRS is a set of accounting standards and rules that companies around the world use to prepare their financial statements. IFRS is used internationally.
What is GAAP?
GAAP stands for Generally Accepted Accounting Principles. Issued by the Financial Accounting Standards Board (FASB), GAAP is a set of principles that companies based in the United States need to adhere to when preparing their financial statements. GAAP is only used in the US.
Understanding IFRS vs. GAAP differences
When it comes to IFRS vs. US GAAP, there are several crucial differences that it’s important to understand. Here are the key points of difference for IFRS vs. GAAP:
1. Rules-based or principles-based
Firstly, there’s a clear difference in terms of methodology. IFRS is principles-based, whereas GAAP is rules-based. Essentially, this means that GAAP is far stricter than IFRS, offering specific rules and procedures that leave little room for interpretation. By contrast, IFRS provides general guidelines that companies are encouraged to interpret to the best of their ability.
2. Revenue recognition
There’s also a significant difference when it comes to IFRS vs. GAAP revenue recognition. Essentially, IFRS is based on the guiding principle that revenue is recognized when value is delivered. GAAP has much more specific rules regarding how revenue is recognized in different industries, but essentially, income isn’t recognized until goods have been delivered or a service has been rendered. When the exchange/service has been completed, the accountant needs to consider the industry-specific rules regarding revenue recognition.
3. Intangible assets
IFRS and GAAP also handle intangible assets in slightly different ways. With IFRS, intangible assets are only recognized if they have a definite future economic benefit to your business. That way, it’s possible to evaluate the asset and provide it with a monetary value. With GAAP, intangible assets are recognized at their current fair market value, with no further considerations required.
IFRS vs. US GAAP also differs in terms of inventory valuation. Under IFRS, the first in, first out (FIFO) inventory valuation method is encouraged. However, the last in, first out (LIFO) method is forbidden. By contrast, GAAP allows the use of the LIFO inventory method, which means that companies using GAAP may end up valuing their inventory differently than businesses using IFRS.
5. Classification of liabilities
It’s essential to recognize the differences associated with the classification of liabilities. When it comes to IFRS vs. GAAP liabilities, you’ll need to prepare your financial statements in slightly different ways. With IFRS, there’s no distinction between different types of liabilities, so you can group long and short-term debts. However, GAAP requires you to distinguish between current and non-current liabilities (i.e., paid within the upcoming 12 months or not paid within the upcoming 12 months) on the balance sheet.
As you can see, IFRS vs. GAAP differences affect a broad range of accounting practices, which is why it’s so important to have a robust understanding of your responsibilities.
Resolving IFRS vs. GAAP differences via convergence
The convergence of IFRS and GAAP to create a single set of accounting standards for worldwide use has been taking place, in some form, for decades. Efforts to reduce the differences between GAAP and IFRS are ongoing. However, we’re still some distance from the US Securities and Exchange Commission (SEC) actually making the switch from GAAP to IFRS. Ultimately, IFRS vs. US GAAP is an issue that businesses will need to deal with for the foreseeable future.
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