Main Difference between IFRS and GAAP
In accounting, there are 2 commonly used methods: The International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP). The IFRS method is commonly used in many countries around the world, while the GAAP is mostly used in the United States.
The IFRS accounting method covers a broad array of topics, including:
- Presentation of financial statements
- Revenue recognition
- Employee benefits
- Borrowing costs
- Income taxes
- Investment in associates
- Fixed assets
- Intangible assets
- Retirement benefit plans
- Business combinations
- Foreign exchange rates
- Operating segments
- Subsequent events
- Industry-specific accounting, such as mineral resources and agriculture
The GAAP accounting method covers the following topics:
- Financial statement presentation
- Business combinations
- Derivatives and hedging
- Fair value
- Foreign currency
- Nonmonetary transactions
- Subsequent events
- Industry-specific accounting, such as airlines, extractive activities, and healthcare
The IFRS Accounting Standards
IFRS is short for International Financial Reporting Standards. IFRS is the international accounting framework which is used to properly organize and report financial information. It is derived from the pronouncements of the London-based International Accounting Standards Board (IASB). It is also the required accounting framework in more than 120 countries. This method also requires businesses to report their financial results and financial position using the same rules.
The GAAP Accounting Standards
The GAAP method is a group of accounting standards and common industry usage that have been developed over many years. Companies and businesses use it due to the following
- Properly organize their financial information into accounting records;
- Summarize the accounting records into financial statements; and
- Disclose certain supporting information.
These two methods have some key differences so as a business owner, you need to know these differences and methods to manage your business or company internationally or domestically. We will discuss below the difference between IFRS and GAAP to understand it more and apply it your business.
Difference between International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP)
Check out some major difference between IFRS and GAAP Accounting Standards:
The first key difference between IFRS and GAAP is the methodology they use to assess the process in accounting. The IFRS focuses on the overall pattern and based on principles, that’s why it is heavily used by many countries because of its general approach. Opposite to IFRS, the GAAP meanwhile focuses more on research- which means a detail oriented and rule-based method. Because of this, the method is quite strict and there is a little room for exceptions or interpretation. For the IFRS, there could be many different interpretations of the same tax-related situations because of its structure.
- International Vs. Domestic
Because of their distinct methodology, another difference between IFRS and GAAP is that the IFRS is globally accepted standard for accounting while the GAAP is only used within the United States. This is due to the fact that the GAAP method has a different set of accounting rules and regulations which is different from the accounting of other countries. This might be more complicated if this method is used when doing business internationally.
- Inventory Methods
When a company or a business is under the GAAP method, it is allowed to use the Last In, First Out (LIFO) method for inventory estimates. However, for those companies and businesses under the IFRS method, the LIFO method for inventory is not allowed. This is because The Last In, First Out valuation for inventory does not reflect an accurate flow of inventory in most cases, which may result in reports of unusually low-income levels.
- Company’s Development Costs
A company or a business development costs can be capitalized if their accounting method is under the IFRS, as long as they met required criteria. With this, it allows the company to leverage depreciation on fixed assets. However, for those companies under the GAAP method, their development costs must be expensed the year they occur and are not allowed to be capitalized, compared to those under the GAAP method.
- Reversal of Inventory
Another difference between IFRS vs GAAP is their inventory write-down reversals. The GAAP method specifies that if the market value of the asset increases, the amount of the write-down cannot be reversed. This is the opposite when it comes to the IFRS method, the amount of the write-down can be reversed in this same situation. The bottom line is, the GAAP method is very cautious when it comes to the reversal of inventory and may not reflect positive changes in the marketplace.
- Income statements
Under the IFRS accounting method, the unusual items of the company or business are included in the income statement and not segregated. However, under the GAAP accounting method, they are separated and shown below the net income portion of the income statement.
- Classification of Liabilities.
Under the GAAP method, the classification of debts is split between current liabilities. The company expects to settle a debt within 12 months, and noncurrent liabilities, which are debts that will not be repaid within 12 months. However, with the IFRS accounting method, there is no difference made between the classifications of liabilities, since all debts are considered noncurrent on the balance sheet.
- Fixed Assets
Companies or businesses under the GAAP method accounting must value assets such as fixed assets (property, equipment, furniture) using the cost model. The cost model includes the historical value of an asset minus any accumulated depreciation. The IFRS method meanwhile allows a different model for fixed assets called the revaluation model, which is based on the fair value at the current date minus any accumulated depreciation and impairment losses.
- Qualitative Characteristics.
Last but not least, other difference between IFRS and GAAP is their qualitative characteristics. The GAAP method performs within a hierarchy of characteristics, such as relevance, reliability, comparability, and understandability, to make informed decisions based on user-specific circumstances. The IFRS method also works with the same characteristics, however, decisions cannot be made on the specific circumstances of an individual.
Knowing the difference between IFRS method and the GAAP method will surely help you not just in managing your accounting but the overall structure of your business. In this way, you’ll know which method is the best way to use in your business.