The difference between GAAP and IFRS
/There are two major accounting frameworks in use in the world today, which are Generally Accepted Accounting Principles ( GAAP ) and International Financial Reporting Standards ( IFRS ). GAAP is primarily used in the United States, while IFRS has been adopted in most other countries. Though the organizations responsible for these two frameworks have engaged in talks to minimize the differences between the frameworks, there are still several significant differences. These differences include the items noted below.
Rules vs. Principles
GAAP is rules based, which means that it is full of very specific rules for how to treat a large number of transactions . This results in some gaming of the system, as users create transactions that are intended to manipulate the rules in order to achieve better financial results. The rules basis also results in very large standards, so that the text of GAAP is much larger than the text of IFRS. IFRS is principles based, so that general guidelines are set forth, and users are expected to use their best judgment in following the principles. This conceptual difference breaks down in some areas, such as financial instruments, where IFRS is essentially rules-based.
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LIFO Inventory
GAAP allows a company to use the last in, first out method of inventory valuation, while it is prohibited under IFRS. LIFO tends to result in unusually low levels of reported income, and does not reflect the actual flow of inventory in most cases, so the IFRS position is more theoretically correct. Both accounting frameworks allow for the use of first in, first out valuations, as well as weighted-average valuations.
Fixed Asset Valuation
GAAP requires that fixed assets be stated at their cost , net of any accumulated depreciation . IFRS allows fixed assets to be revalued, so their reported values on the balance sheet could increase. The IFRS approach is more theoretically correct, but also requires substantially more accounting effort.
Write Down Reversals
GAAP requires that the value of an inventory asset or fixed asset be written down to its market value ; GAAP also specifies that the amount of the write-down cannot be reversed if the market value of the asset subsequently increases. Under IFRS, the write-down can be reversed. The GAAP position is excessively conservative, since it does not reflect positive changes in market value.
Development Costs
GAAP requires that all development costs be charged to expense as incurred. IFRS allows certain of these costs to be capitalized and amortized over multiple periods. The IFRS position may be too aggressive, allowing for the deferment of costs that should have been charged to expense at once.
We have noted some of the more significant differences between GAAP and IFRS. There are hundreds of smaller differences within each of the major topics of accounting, which are constantly being adjusted as the two standards are updated.
IASB vs. FASB
GAAP is derived and maintained by the Financial Accounting Standards Board , which is based in the United States. It is distinctly separate from the International Accounting Standards Board, which oversees IFRS, and is based in England. The two organizations do not share any management members, though they meet regularly to discuss the differences in their methodologies.
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Applicable Financial Reporting Framework
