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Outsource IFRS vs. GAAP
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.
GAAP
IFRS
Key Features
GAAP
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
IFRS
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
Performance Elements
GAAP
Assets or liabilities, revenue and expenses, gains and losses, and comprehensive income
IFRS
Assets or liabilities, revenue and expenses
Inventory
GAAP
Both LIFO (last-in first-out) and FIFO (first-in, first-out) can be used
IFRS
LIFO cannot be used
Inventory Reversal
GAAP
Prohibited
IFRS
Permitted under certain conditions
Consolidation
GAAP
Follows a risk-and-rewards based model
IFRS
IFRS prefers a control-based model
Income Statement
GAAP
Extraordinary items are shown separately under net income
IFRS
Extraordinary income is not segregated
Required Documents for Financial Statements
GAAP
Balance sheet, income statement, changes in equity, cash flow statement ,statement of comprehensive income and footnotes
IFRS
Balance sheet, cash flow statement , income statement, changes in equity and footnotes
Earning-per-share
GAAP
The individual interim period incremental costs are computed as part of the overall average
IFRS
Calculations do not take into account the average of interim period calculations
Framework Purpose
GAAP
The US GAAP framework does not expressly require a companies' management to consider the framework in the absence of another standard
IFRS
According to IFRS, the company management is expressly required to consider the same framework unless any other standard is available
Development Costs
GAAP
All expenses are considered costs
IFRS
Costs are capitalized in case where key criteria is met
Required Functional Period
GAAP
Comparative financial information for the past 3 years is necessary
IFRS
A years' worth of financial information is required
Financial Liability and Debt
GAAP
Equity instruments are treated upon face value
IFRS
All equity instruments are considered as debt
Underlying Assumptions
GAAP
The "going-concern" assumption is not well-developed for the USA GAAP framework
IFRS
IFRS gives special importance to underlying assumptions, including "accrual" and "going-concern"
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.
Outsource2india - Knowledge Leaders & Expert Solution Providers for IFRS and GAAP Convergence Solutions
At O2I, we consider ourselves as one step ahead of the rest when it comes to providing convergence solutions for IFRS and GAAP for global companies. With 25 years in providing stellar finance and accounting services, you can bank on us to channelize your inputs for immediate gains.
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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