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Accounting Principles vs Rules
IFRS vs GAAP
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Measure State and you Measure Progress
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GAAP vs IFRS
As the name suggests, GAAP (US Generally Accepted Accounting Principles), promulgated by the US Financial Accounting Standards Board (FASB) is the accounting standard used in the USA, while IFRS (International Financial Reporting Standards), defined by the International Accounting Standards Board (IASB) is the standard of accounting used in over 110 various countries across the world. In its primary form, GAAP is considered as a 'rule-based' accounting system, whereas IFRS is more 'principle-based'.
As the drive towards convergence between GAAP and IFRS becomes faster and more furious, the details of the differences that are yet to be converged become more and more important. The US Securities and Exchange Commission is strongly in favor of retaining GAAP, whereas other countries such as Japan, China, and India are slowly gravitating towards using IFRS in some form or other.
IFRS and GAAP - Why Financial Bilingualism Is Important
The ever-increasing global adoption of IFRS affects US-based businesses, as other countries require IFRS for public filings and other statutory reports. Such IFRS requirements also impact US businesses through cross-border activities, M&A (Merger and Acquisition) activities, etc. As a result, financial bilingualism is a far more important criterion for US accountants, as US-based investors keep looking towards overseas investment opportunities. On the flipside, the US market also remains favorably open to non-US businesses who can prepare their statements using IFRS.
With the help of this article, our aim is to provide a broader understanding of IFRS and GAAP differences, and assist investors and accounting professionals to become increasingly bilingual in these two accounting standards.
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ACCOUNTING PRINCIPLES AND RULES
The Essential Difference Between IFAS and GAAP
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GAAP
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IFRS
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Key Features
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The main attributes of GAAP include reliability, relevance, understandability, and comparability. Both relevance and reliability are considered primary attributes, whereas comparability comes in second, followed by understandability, which is considered a user-specific attribute
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The key features of IFRS also include relevance, reliability, comparability and understandability. However, a key difference from GAAP is that none of the attributes are considered special and above the others
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Performance Elements
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Assets or liabilities, revenue and expenses, gains and losses, and comprehensive income
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Assets or liabilities, revenue and expenses
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Inventory
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Both LIFO (last-in first-out) and FIFO (first-in, first-out) can be used
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LIFO cannot be used
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Inventory Reversal
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Prohibited
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Permitted under certain conditions
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Consolidation
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Follows a risk-and-rewards based model
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IFRS prefers a control-based model
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Income Statement
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Extraordinary items are shown separately under net income
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Extraordinary income is not segregated
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Required Documents for Financial Statements
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Balance sheet, income statement, changes in equity, cash flow statement ,statement of comprehensive income and footnotes
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Balance sheet, cash flow statement , income statement, changes in equity and footnotes
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Earning-per-share
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The individual interim period incremental costs are computed as part of the overall average
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Calculations do not take into account the average of interim period calculations
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Framework Purpose
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The US GAAP framework does not expressly require a companies' management to consider the framework in the absence of another standard
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According to IFRS, the company management is expressly required to consider the same framework unless any other standard is available
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Development Costs
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All expenses are considered costs
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Costs are capitalized in case where key criteria is met
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Required Functional Period
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Comparative financial information for the past 3 years is necessary
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A years' worth of financial information is required
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Financial Liability and Debt
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Equity instruments are treated upon face value
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All equity instruments are considered as debt
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Underlying Assumptions
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The 'going-concern' assumption is not well-developed for the USA GAAP framework
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IFRS gives special importance to underlying assumptions, including 'accrual' and 'going-concern'
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The Global Point of View: IFRS or GAAP?
Many experts and world renowned economists believe in the long-term vision of a consistent, high-quality, globally-accepted accounting standard. In case of IFRS vs. GAAP, it is IFRS which is best positioned to serve that role. However, countries such as US cannot move from their existing standard to a new one outright.
Keeping the above factors in mind, both the FASB and IASB should continue to focus on improving the quality of their standards while focusing on inter-operability so as to prevent further divergence between US GAAP and IFRS.
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Read more about IFRS and find out how O2I can help with IFRS compliant accounting. Contact us with your accounting and bookkeeping requirements and our Customer Engagement team will contact you within 24 hours.
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