There are two frameworks for statutory financial reporting: Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). As companies continue to expand across borders and investors look overseas into emerging markets, it’s becoming increasingly important for business and financial leaders to be bilingual in these financial principles and procedures.
Generally speaking, there are more similarities than differences between GAAP and IFRS. However, it’s essential to understand those differences in order to remain legally compliant while conducting business domestically and abroad. Here are the top 8 differences between GAAP and IFRS.
- Global vs. Domestic
GAAP is the standard in the United States, and IFRS is the standard in more than 110 countries across the globe. While there have been major advances towards aligning the two, a final agreement has yet to be established.
Currently, GAAP is relevant to U.S. businesses that release financial statements to the public and companies that are publicly traded, but it’s also important for organizations who are preparing for M&A or are looking to get funding. U.S. companies with international ties should be navigating both GAAP and IFRS.
- Rules-Based vs. Principles-Based
Based on research, GAAP establishes a specific set of rules that leave little room for interpretation. IFRS is based on patterns and sets its standards on principles, which are open to exceptions and interpretations.
- Financial Statement Presentation
While there are many similarities in the presentation of financial statements between the two standards, there are differences several specific areas, including the presentation of debt as current versus noncurrent, classification of expenses on income statements, discontinued operations criteria on income statements, and inclusion of a third balance sheet.
- Inventories – Costing Methods and Reversals
GAAP doesn’t explicitly require a consistent cost formula for inventories, and it allows for the Last In, First Out (LIFO) method of tracking. IFRS prohibits LIFO inventory tracking and requires the same cost formula to be applied to all similar inventories.
When it comes to inventory reversals, GAAP is quite cautious and IFRS is better-suited for accommodating positive shifts in the market. With GAAP, any write-down of inventory below-cost establishes a new and permanent cost basis, while IFRS can reverse those losses when the reasons for the impairment no longer exist.
- Intangible Assets
Non-monetary assets that don’t have physical substance (i.e. intangible assets) are also handled differently between GAAP and IFRS. Research & development costs and advertising costs, for example, are recognized solely for their fair market value with GAAP, but IFRS allows future economic benefit to be considered.
- Fixed Assets
GAAP and IFRS use different models for establishing the value of fixed assets, such as property and equipment. GAAP requires the cost model, which takes the historical value of the asset minus the accumulated depreciation. IFRS uses the revaluation model, which uses the modern fair market value instead of the historical value.
- Development Costs
GAAP requires development costs to be expensed in the year that they occur, which means they are not able to be capitalized, but IFRS allows businesses to leverage depreciation on fixed assets, as long as certain criteria are met.
- Consolidation Models
GAAP provides for two consolidation models, variable interest model and voting model, and does not consider the notion of de facto control. IFRS provides a single control model, and it considers potential voting rights and de facto control. There are also significant differences involving the preparation of consolidated financial statements, uniform accounting policies, changes in ownership interest, equity method investments, and joint ventures.
Navigating international statutory financial reporting is complicated. With over 35 years of experience, Hall & Company’s CPAs and International Taxation Experts have guided countless companies through GAAP and IFRS Financial Reporting. Contact us via email or call our offices at: 949-910-HALL (4255).