In the world of accounting, there are two different standards of financial reporting. International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP).
IFRS is the most widely used system in the world, with over 110 countries using this method of accounting for publicly traded companies. On the other hand, the GAAP is created by the Financial Accounting Standards Board to guide public companies in the United States when compiling their annual financial statements.
Let’s take a quick look at the definitions of the terms GAAP and IFRS
What is IFRS in Accounting?
The IFRS is a set of standards developed by the International Accounting Standards Board (IASB). Globally, IFRS govern how companies prepare their financial statements. It only provides guidelines that harmonise the standards to make the accounting process uniform across the world, not instructions on how to prepare financial statements. Investors worldwide use these statements to decide whether or not to invest. The IFRS is used in Europe, South America, Asia, and Africa.
What is GAAP?
The GAAP comprises a set of principles that companies in the United States are obligated to adhere to while creating their annual financial statements. These guidelines ensure that public companies’ financial statements submitted to the US Securities and Exchange Commission (SEC) are consistent and minimise discrepancies. This approach allows investors to compare financial statements of different publicly-traded companies, aiding them in making informed decisions regarding investments.
Top 10 key differences between GAAP and IFRS
GAAP vs IFRS is the most debatable topic in accounting where the former is defined as the financial reporting method having universal applicability while the latter are the set of guidelines made for financial accounting. As an account professional or business owner, it is vital to know the variations of these accounting methods, in order to successfully manage your company globally, as well as domestically.
IFRS is a globally adopted method for accounting, while GAAP is exclusively used within the United States.
GAAP focuses on research and is rule-based, whereas IFRS looks at the overall patterns and is based on principle.
3. Developed by
The principles of IFRS are issued by the International Accounting Standard Board (IASB), while GAAP are issued by Financial Accounting Standard Board (FASB)
4. Inventory Methods
GAAP uses the Last In, First Out (LIFO) method for inventory estimates. However, in IFRS, the LIFO method for inventory is not allowed.
5. Inventory Reversal
IFRS and GAAP accounting also differ when it comes to inventory write-down reversals. In GAAP, the amount of the write-down cannot be reversed. However, under IFRS, the amount of the write-down can be reversed.
6. Income Statements
Extraordinary or unusual items are included in the income statement and not segregated under IFRS. While, under GAAP, they are separated and shown below the net income portion of the income statement.
7. Intangible Assets
When it comes to intangible assets, IFRS takes into account whether an asset will have a future economic benefit as a way of assessing the value. Intangible assets measured under GAAP are recognized at the fair market value and nothing more.
8. Fixed Assets
In fixed assets, companies using GAAP accounting must value these assets using the cost model. IFRS uses a different model for fixed assets called the revaluation model.
9. Development Costs
Development costs can be capitalized under IFRS, as long as certain criteria are met. With GAAP, development costs are not allowed to be capitalized.
10. Quality Characteristics
Finally, the qualitative characteristics of how the accounting methods function. GAAP uses a hierarchy of characteristics, such as relevance, reliability, comparability and understandability, to make informed decisions based on user-specific circumstances. IFRS also works with the same characteristics, except that decisions cannot be made based on an individual’s specific circumstances.
The value of accounting knowledge
Understanding these key differences between IFRS and GAAP accounting is important so your company can accurately do business internationally. You can improve your understanding of these accounting standards by taking an online course so that you can examine financial statements more effectively and learn more about your company’s performance.
Join an MBA in Accounting and Finance program to understand explicit instruction in accounting principles and all financial standards. Get the master’s degree online or part-time with Exeed College for career advancement.