If you’re doing business internationally, it’s important to understand the difference between national and international accounting standards. While the Financial Accounting Standards Board (FASB), who define US accounting standards, and the International Accounting Standards Board (IASB) continue to work closely together towards convergence, US accounting currently differs greatly from accounting practice abroad.
What is the GAAP?
The Financial Accounting Standards Board defines the accounting standards for the US. Collectively, these standards form what are called the generally accepted accounting principles (GAAP). The GAAP outlines the procedures and practices that must be followed by public companies in the US, including what financial statements and other information must be recorded and reported.
Meanwhile, the International Accounting Standards Board defines the International Financial Reporting Standards (IFRS), an international equivalent to the GAAP, which is followed by over 120 countries including those in the EU.
US accounting vs. international accounting: key differences
Efforts have been made by both the FASB and IASB to converge the two sets of principles since 2002. Since 2007, foreign companies in the US have been able to forgo reconciling financial statements with the GAAP if their accounts already comply with the IFRS, for Securities and Exchange Commission (SEC) reporting specifically. Eventually, the US is expected to shift towards international standards, but doing so is a long process.
While the difference between national and international accounting standards continues to shrink, the differences that still exist are significant.
Below are some of the most notable differences between US accounting standards and international accounting standards:
LIFO inventory accounting
Last in, first out (LIFO) is an inventory method where a company records its most recently produced products as sold first. This means that the cost of the most recent items produced or purchased are expensed first, in order to benefit from lower taxes.
For example, imagine a company purchases 10 umbrellas today at $30 each, and purchased 10 umbrellas last week at $15 each. The company then sells 15 umbrellas, all at the same price. Through the LIFO method, the most recently purchased items – the $30 umbrellas – are first sold. That means the cost of goods sold (COGS) for the 15 umbrellas is reported as $375. If the inventory was recorded using the first in, first out (FIFO) method, the COGS would be $300. This method is used in periods of rising prices or inflation because higher costs and lower net income means lower taxable income.
Under GAAP, businesses are able to use the LIFO method, but this method is strictly prohibited under IFRS. There are other differences in inventory accounting too; for instance, inventory under GAAP is carried at the lower of cost or market, while under IFRS inventory is carried at the lower of cost or net resizable value.
International accounting differs from US accounting when it comes to long-lived assets. Under GAAP, long-lived assets cannot be revalued, while IFRS does allow for some revaluation. GAAP allows for the depreciation of long-lived assets, but it’s uncommon, while under IFRS the depreciation of long-lived assets is a requirement if components of the asset have differing patterns of benefit.
Long-lived assets are accounted for on a historical cost basis under IFRS, while in US accounting there is no separate definition for investment-only property.
Under IFRS, companies must regularly produce balance sheets, income statements, cash flow statements, changes in equity documents and a number of associated footnotes. Through GAAP, you must present all of the same reports as IFRS, with the addition of statements about comprehensive income.
In the US, the GAAP states that tax deferrals are able to be classified as current or non-current in balance sheets on a circumstantial basis. The IFRS, on the other hand, states that tax deferrals can only be treated as non-current.
Similarly, balance sheets under GAAP must present current accounts before non-current, while internationally, non-current liabilities are often listed first.
The process for determining whether a lease purchase is deemed expensed or capitalized differs between the US and abroad. Under GAAP, US companies can capitalize lease purchases based on specific GAAP capitalization criteria. Should the leased purchase provide measurable future economic value, it’s able to be classed as a capitalized asset.
The IASB does not have a similar predetermined criterion, and instead deals with each leased asset on a case-by-case basis.
Inflation and deflation
US accounting standards disregard the effect of deflation and inflation when it comes to account analysis. International standards differ, with financial reporting adjusted using a price-index to reflect the effects of inflation or deflation.
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