GAAP vs IFRSDifferences You Need to Know Between the Two!

Written By:
Adiste Mae

GAAP vs. IFRS: An Overview

GAAP or the Generally Accepted Accounting Principles are a common set of accounting practices – principles, standards, and procedures – that govern what accountants and companies should follow when it comes to the compilation of their financial statements.

In the United States, the GAAP is the framework within which the financial reporting practices that are set forth by the Financial Accounting Standards Board (FASB), are organized.

Depending on the country, the financial standards can vary. 

The IFRS or the International Financial Reporting Standards are issued by the International Accounting Standards Board (IASB) and outline what transactions or accounting events should be reported in the financial statements.

It also provides the guidelines of how accountants and companies should be maintaining and reporting their accounts.

Because IFRS is a set of international accounting standards, it allows for companies from different industries and different countries to understand the accounting language that they are trying to convey.  

With the aim of IFRS to provide a common accounting language for companies around the world, 144 countries have already adopted the IFRS.

As a matter of fact, the United States Securities and Exchange Commission have expressed their intent to move from GAAP to IFRS. 

GAAP

GAAP’s four basic principles are Cost, Revenue, Matching, and Disclosure.

It is the accounting standard that has been adopted by the US Securities and Exchange Commission.

Therefore, when a company issues financial statements externally, it must adhere to the Generally Accepted Accounting Principles.

In the same way, when the stocks of a corporation are publicly traded, the SEC requires their financial statements to also follow GAAP. 

For investors looking at the financial statements of companies, they must exercise caution when the standard is not followed.

The topics that GAAP covers are materiality, classification, revenue recognition, and balance sheet. 

With GAAP, completeness, consistency, and comparability are the main objectives.

Companies still have the option of using GAAP or non-GAAP measures but they must be identified in the financial statements. 

IFRS

The main objective of the IFRS is to create a common accounting language between companies from around the world that will provide consistency and transparency in the accounting practices, financial statements, and also help investors, investors, and stakeholders make educated financial decisions. 

IFRS is the standard followed by the European Union (EU) and some parts of Asia and South America.

However, the standard used by the United States is the Generally Accepted Accounting Principles (GAAP). 

Key Differences

IFRS is considered to be a more principles-based standard while GAAP is more rules-based.

The IFRS is also adopted by over 100 countries worldwide, while GAAP is only mandated in the United States by the SEC.

The other key differences between these standards pertain to the treatment of inventory and recognition of intangible assets. 

IFRS prohibits the use of LIFO (Last In, First Out) in accounting for inventory.

GAAP allows the use of both FIFO (First In, First Out) and LIFO.

Under IFRS, using LIFO will not be able to present an accurate inventory flow and may present lower levels of income. 

Another key difference is also the treatment of intangibles.

Under IFRS, intangibles are only recognized if they have a future economic benefit to the company.

Whereas GAAP recognizes intangibles at their current market value, without having to make additional future considerations.