IFRS vs US GAAP: 10 Notable Differences Explained
All over the globe, accounting is governed by different standards and principles that ensure financial reporting remains consistent, reliable, and transparent.
Two of the most widely recognized accounting frameworks are the United States Generally Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRS).
While IFRS and US GAAP share many similarities, there are notable differences, and companies must carefully consider these distinctions when preparing financial statements and ensure compliance with the appropriate accounting standards based on their location and reporting requirements.
What Are IFRS and US GAAP?
But before diving into GAAP vs IFRS differences, let’s review some foundational IFRS and US GAAP information. It’s important to review the definitions, as it gives you an idea of why these accounting regulations differ in the first place.
IFRS:
US GAAP:
Differences of IFRS vs GAAP:
Intangible Assets and Development Costs
Under IFRS, companies can capitalize on development costs for intangible assets if certain criteria are met, such as technical feasibility and the intention to complete the asset. This recognition of internally generated intangible assets enables a more precise portrayal of a company’s value.
In contrast, US GAAP requires expensing research and development costs as they are incurred, which can result in lower reported profits but more conservative financial reporting.
Impairment of Assets
IFRS assesses impairment using a one-step model, comparing an asset’s carrying value with its recoverable value to determine if impairment exists. This approach simplifies the impairment evaluation process and can lead to more frequent impairments.
On the other hand, US GAAP employs a two-step model, first testing the recoverability of the asset and then assessing impairment based on fair value. This method may result in fewer impairments and potentially higher asset values on the balance sheet.
Treatment of Leases
IFRS considers all leases as finance leases, which must be recorded on the balance sheet as both an asset and a liability. This method ensures financial reporting transparency and accurate representation of a company’s financial commitments.
Conversely, US GAAP distinguishes between operating and finance leases, with only finance leases recognized on the balance sheet. This approach can result in off-balance-sheet financing and potentially misleading financial statements.
Financial Statement Presentation
LIFO Inventory Accounting and Extraordinary Items
Error Correction
Contingencies
Inventory Valuation
IFRS allows for inventory reversal write-down if the inventory value subsequently increases, reflecting the most recent information about the inventory’s market value. Utilizing this holistic approach, we get a more accurate representation of a company’s current financial position.
On the other hand, US GAAP prohibits inventory reversal write-down, meaning that once inventory is written down, it cannot be written back up even if its value increases. This conservative approach can result in a lower reported asset value and potentially understate profits.
Financial Instruments
IFRS allows fair value measurement for financial instruments; this allows for an accurate reflection of a company’s financial position in current market conditions. However, this approach can introduce volatility in reported earnings due to fluctuations in market values.
US GAAP adopts a mixed model, classifying financial instruments into different categories and applying varying measurement methods. This method may offer more stable reported earnings but can result in a less transparent view of a company’s financial position.
Construction Contracts
The IFRS standard mandates the use of the percentage of completion method for construction contracts. This method recognizes revenue and expenses over the entire duration of the contract based on how much of the work has been completed. It is considered a more accurate representation of a company’s financial performance during the contract period.
On the other hand, US GAAP allows for two methods – the percentage of completion method and the completed contract method. The completed contract method delays revenue and expense recognition until the contract is complete. This can potentially distort reported earnings during the contract period, but it offers a more conservative view of financial performance.