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FAQs

FAQs

What are the differences between US GAAP and IFRS?

US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) are two of the major accounting standards followed globally, but at the same time, they have quite substantial differences with respect to many areas:

  1. Governing Bodies: Generally, it is instituted and regulated in the United States by the Financial Accounting Standards Board or FASB. The IFRS are issued by the International Accounting Standards Board or IASB. GAAP becomes mandatory for United States companies, most especially those listed on U.S. stock exchanges, whereas IFRS are adopted by many countries globally both in Europe and in Asia.
  2. Principles versus Rules: Perhaps the most fundamental difference between US GAAP and IFRS is that whereas US GAAP is rules-based-although it provides detailed rules for almost any situation, which quite often tends to give rise to more rigid interpretations of such rules-IFRS are more principles-based and hence provide broader guidelines on various topics, thereby allowing flexibility and judgment when applying accounting standards. Therefore, in many cases IFRS requires more judgments by accountants.
  3. Revenue Recognition: GAAP has more detailed criteria on revenue recognition, hence resulting in more complicated rules regarding recognizing revenue in a certain industry. IFRS is more about the principle of the transfer of control of goods or services to a customer; thus, it allows a simpler, more streamlined approach.
  4. Inventory Valuation: While under GAAP, companies can employ both the Last-In, First-Out (LIFO) and First-In, First-Out (FIFO) methods in valuing their inventory, IFRS does not permit LIFO. Therefore, companies under IFRS will apply only the FIFO or weighted-average cost methods.
  5. Cost of Development: Under GAAP, research and development expenses are expensed as incurred. However, under IFRS, development costs may be recognized as intangible assets if they meet some thresholds on future economic benefits.
  6. Structure of Financial Statements: The structure of the latter is also different. GAAP is much more prescriptive as to form and content, while IFRS is less so, leaving more flexibility to companies in presenting their financial statements.

In a nutshell, the key differences between GAAP and IFRS by One IBC USA are that the two set different approaches to the presentation of the same occurrence: it is either rules-based or principles-based. There are also several detailed accounting treatments that involve such positions as inventory valuation and revenue recognition, for example. And lastly, different regulatory authorities back up these two accounting standards. All these differences need to be taken into consideration by a company operating in both arenas or migrating from one framework to another.