US GAAP and IFRS: What Is the Difference?
In accounting, two sets of financial reporting standards hold a significant place – International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP).
These standards play a significant role in ensuring transparency and consistency in financial reporting across the globe. Let’s explore the key differences between US GAAP and IFRS in this article.
About IFRS and GAAP
IFRS (International Financial Reporting Standards)
IFRS represents a set of standards developed by the International Accounting Standards Board (IASB). Globally, IFRS governs how companies prepare their financial statements, providing guidelines to abide by the standards, making the accounting process uniform worldwide.
Investors use these statements to make investment decisions, and IFRS is widely adopted in Europe, South America, Asia, and Africa.
GAAP (Generally Accepted Accounting Principles)
GAAP, on the other hand, is a set of principles that guide the preparation of annual financial statements for public companies in the United States.
These principles ensure the consistency of financial statements submitted to the US Securities and Exchange Commission (SEC), allowing investors to compare statements and make informed investment decisions.
Top Key Differences Between GAAP and IFRS
| GAAP | Difference | IFRS |
|---|---|---|
|
Exclusively used within the United States |
Adoption |
Globally accepted |
|
Rule-based research |
Methodology |
Principles-based approach |
|
Guided by the Financial Accounting Standards Board (FASB) |
Developed by |
The International Accounting Standards Board (IASB) |
|
Typically presents three periods |
Income Statement |
Often shows two |
|
Lists assets in decreasing order of liquidity |
Balance Sheet |
Lists them in increasing order.
|
|
Places specific items in the operating activities section |
Statement of Cash Flows |
Provides more flexibility |
|
Treats each quarterly report as part of the fiscal year, requiring a Management's Discussion and Analysis section |
Quarterly/Interim Reports |
Considers each interim report as a standalone period |
|
Allow non-standardized metrics |
Non-Standardized |
Prohibits using them directly on financial statements |
|
Whether an item is recognized as an asset, liability, revenue, or expense can differ |
Recognition of Accounting Elements |
Whether an item is recognized as an asset, liability, revenue, or expense can differ |
|
Differences in the likelihood threshold and measurement techniques can lead to distinct recognition and measurement of contingent liabilities.
|
Contingent Liabilities |
Differences in the likelihood threshold and measurement techniques can lead to distinct recognition and measurement of contingent liabilities.
|
|
The treatment of deferred tax assets varies between the standards. |
Income Taxes |
The treatment of deferred tax assets varies between the standards. |
|
Includes all property in PP&E |
Investment Property |
Separates investment property from PP&E |
|
Treats harvestable plants and production animals differently |
Biological Assets |
- |
|
Allows LIFO and FIFO methods |
Inventory |
Prohibits LIFO |
|
Uses the initial cost for measurement |
Fixed Assets |
Allows fair value treatment, with potential value changes |
|
Reports intangible assets at cost, |
Intangible Assets |
Allows fair value treatment.
|
|
Vary |
Disclosures |
Vary |
|
Differences in terms like "probable" and "recognized contingent liabilities" exist, affecting the presentation of financial information |
Terminology |
Differences in terms like "probable" and "recognized contingent liabilities" exist, affecting the presentation of financial information |
Similarities Between US GAAP and IFRS
Despite the differences, there are noteworthy similarities between US GAAP and IFRS. Recent accounting rule changes, such as the Revenue Recognition and Lease Standards, demonstrate convergence in certain areas.
These changes enhance the standardization and comparability of financial reporting across different industries.
Global Trends
Two significant trends highlights the relevance of understanding US GAAP and IFRS differences:
Geographic Diversification
Investment firms are expanding their geographic scope, and many foreign SEC registrants use IFRS standards. This trend encourages investors to consider opportunities overseas and diversify their portfolios.
Cross-Border M&A Activity
International mergers and acquisitions are on the rise. For such deals, investment bankers need to compare the financial reporting of both US and non-US companies, necessitating a grasp of both accounting standards.
In a Nutshell
Understanding the differences between US GAAP and IFRS is important for businesses and investors operating in a global financial landscape.
While convergence between these two standards has been a goal, coexistence and continued distinctions necessitate a comprehensive understanding of both sets of accounting principles.
As businesses expand globally and cross-border investments become more common, this knowledge becomes an invaluable asset.
If you’re a business operating in Malaysia and require expert guidance on financial reporting, consider collaborating with a trusted accounting firm in Malaysia. Their expertise in navigating the nuances of accounting standards can be instrumental in your success on both domestic and international fronts.
