Two significant standards for financial reporting are recognised globally: GAAP and IFRS. Knowledge of GAAP and IFRS is essential for companies operating globally, as they affect the preparation and presentation of financial statements.
GAAP stands for Generally Accepted Accounting Principles. It is a list of accounting rules, concepts, and regulations businesses in the United States apply when preparing their accounts.
GAAP is required by law for all firms listed on the American Stock Exchange and is widely applied by public enterprises. The Financial Accounting Standards Board (FASB) sets these standards. Several standards have been developed to address particular industries’ practices.
IFRS is an acronym that stands for International Financial Reporting Standards. The International Accounting Standards Board (IASB) issues these accounting standards to ensure that financial statements are in the same format, understandable, and retractable across national boundaries.
IFRS is implemented in over 144 countries, including the EU, Canada, and Australia. It is mandatory for all companies operating in these regions if they are currently listed in the stock market; many private companies also use it.
Feature | GAAP | IFRS |
Full-Form | Generally Accepted Accounting Principles | International Financial Reporting Standards |
Primary Applicability | United States | Over 144 countries worldwide |
Governing Body | Financial Accounting Standards Board (FASB) | International Accounting Standards (IAS) |
Inventory Valuation | LIFO, FIFO, and weighted average is allowed | FIFO and weighted average are allowed |
Revenue Recognition | Specific, criteria-based approach with multiple revenue recognition principles (e.g., contract-based, performance-based) | Principle-based approach focusing on the transfer of control of goods or services |
Development Costs (These costs are internally generated for developing intangible assets that have no physical form, such as patents, intellectual property, and client relationships.) | Expensed as incurred, except in limited cases of capitalisation | Capitalise if certain conditions are met, including the project's achievement being considered technically feasible |
Revaluation of Assets | Fair market value revaluation is only allowed for marketable securities such as investments and stocks | IFRS allows for the revaluation of a wide range of assets, such as plant, property, equipment, PPE, inventories, and intangible assets, to the fair value of investments in Marketable Securities |
Inventory Write-down | Based on the lower-of-cost-or-market (LCM) concept | Similar to GAAP, but some differences in the definition of market value |
Balance Sheet | Emphasises historical cost with few fair value exceptions, such as that of marketable securities | More flexibility in choosing assets and liabilities that can be carried at fair value |
Cash Flow Statement | Both direct and indirect methods are acceptable | The indirect method is preferred |
Required Financial Statements |
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A company based in the U.S. and operating under GAAP may realise revenue from a particular sale once the goods have been delivered and the buyer is expected to pay and meet FASB criteria.
An EU-based company adopting IFRS (revenue from contracts with customers) would record revenue from a sale under IFRS 15 when the goods are delivered to the customer and the customer obtains control, which is based on principles and not rules.
The decision to use GAAP or IFRS depends on the region of operation of the business and the functionality it offers. GAAP is particular and focused in its guidelines, mainly used in the United States. In contrast, IFRS is much more flexible and can be implemented globally. Companies must know GAAP and IFRS to maintain compliance and prepare accurate financial statements. What criteria will you use to select a standard that best suits the company?