Differences between GAAP and IFRS

Differences between GAAP and IFRS

We live in an increasingly global economy, so being aware of the variations between the two prevalent accounting methods worldwide is critical for business owners and accounting professionals. As the name suggests, the International Financial Reporting Standards (IFRS) is an international standard established by the International Accounting Standards. The US.

Only in the United States are Widely Accepted Accounting Principles used. GAAP was developed by the Board of Financial Accounting Standards. Let’s look at the ten most remarkable differences in accounting for IFRS and GAAP.

Local vs Global: In more than 110 nations worldwide, including the EU and several Asian and South American countries, IFRS is used. By comparison, GAAP is only used in the United States. In their accounting, businesses that work in the U.S. and abroad which have more difficulties.

Rules vs Principles: GAAP tends to be more based on rules, whereas IFRS tends to be more based on values. Companies with industry-specific regulations and guidelines follow GAAP, whereas IFRS has standards requiring judgment and interpretation to decide how to apply them in a given situation.

Nonetheless, FASB and IASB integration efforts have resulted in new GAAP and IFRS specifications that share more similarities than differences. For example, a similar principles-based approach is shared by the current GAAP standard for client contract revenue, Auditing Standards Update (ASU) No. 2014-09 (Topic 606) and the related IFRS standard, IFRS 15.

Inventory Methods: First In, First Out (FIFO), weighted-average rate, and basic identification methods for valuing inventories are permitted by GAAP and IFRS. However, GAAP also allows Last In, First Out (LIFO) technique, which is not permitted under IFRS. The use of the LIFO method may result in artificially low net income and may not reflect the actual flow through a company of inventory goods.

Inventory Write-Down Reversals: The two methods make it possible to write inventories down to market value. If the market value increases later, however, only IFRS allows the earlier write-down to be reversed. Reversal of previous write-downs is forbidden under GAAP. Under IFRS, inventory valuations can be more unpredictable. 

Fair Value Revaluations: First In, First Out (FIFO), weighted-average rate, and basic identification methods for valuing inventories are permitted by GAAP and IFRS. However, GAAP also allows Last In, First Out (LIFO) technique, which is not permitted under IFRS. The use of the LIFO method may result in artificially low net income and may not reflect the actual flow through a company of inventory goods.

Impairment Losses: The two methods make it possible to write inventories down to market value. If the market value increases later, however, only IFRS allows the earlier write-down to be reversed. Reversal of previous write-downs is forbidden under GAAP. Under IFRS, inventory valuations can be more unpredictable.

Intangible Assets: When such conditions are met, internal costs for producing intangible assets, such as construction costs, are capitalised under IFRS. Consideration of potential economic gains is included in these parameters.

Under GAAP, production costs, except for internally developed applications, are paid as incurred. Costs are capitalised for applications that can be used externally after technical viability has been seen. If the programme is being used internally, it is only during the production stage that GAAP requires capitalisation. For applications, IFRS has no clear guidelines.

Fixed Assets: GAAP needs long-lived properties to be priced and reasonably depreciated at the historical expense, such as homes, furniture and equipment. Under IFRS, any distinct components of an asset of different valid lifetimes must be depreciated separately. GAAP makes, but it is not needed, for component depreciation.

Investment Property: IFRS covers a separate category of investment property, defined as property retained for rental income or capital appreciation. Investment property is initially calculated at the expense and can be revalued to market value afterwards. GAAP does not have a separate category like that.

Lease Accounting: While GAAP and IFRS approach shares a similar structure, there are a few notable differences. The de minimus exemption in IFRS allows lessees to exclude leases for low-value properties, while there is no such exception in GAAP. Leases for some categories of intangible assets are included in the IFRS norm, although GAAP categorically excludes leases of all intangible assets from the lease accounting standard scope.

For business owners operating globally, recognising these variations between IFRS and GAAP accounting is essential. These discrepancies need to be understood by investors and other stakeholders to view financials accurately under either standard.

About the author
Cpadesk
Cpadesk

CpaDesk Is An Online Accounting Forum/ Community That Brings Accounting Advisors, Students, And Those Who Are Looking For Knowledge And Information.

Read more

Spread the word about us. Share if you Like this article 👍.

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on pinterest
Pinterest
Share on whatsapp
WhatsApp
error: Content is protected !!
Scroll to Top