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Key Differences Between GAAP and IFRS: What Your Business Needs to Know

Updated on: Aug 19th, 2024

4 min read

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.

All You Need to Know About GAAP

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.

Applicability of GAAP

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.

Importance of GAAP

Consistency: GAAP standardises accounts, enabling investors and analysts to compare different firms' balance sheets and income statements easily.
Transparency: GAAP is highly useful in giving an unobstructed view of a company’s financial position.
Regulatory Compliance: Assists organisations to meet several regulatory obligations within the United States.

Benefits of Using GAAP

Standardisation: GAAP contributes to the enhancement of the comparability of financial reports.
Credibility: Improves the reliability of financial statements and increases confidence among investors and stakeholders.
Detailed Guidance: Provides a wide range of services to explain accounting issues.

All You Need to Know About IFRS

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.

Applicability of IFRS

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.

Importance of IFRS

Global Consistency: Facilitates the preparation of accounts in standard rules used by businesses with international operations.
Transparency: It makes financial information more transparent and comparable.
Investor Confidence: International investors and regulatory bodies widely accept and recognise IFRS.

Benefits of Using IFRS

Comparability: IFRS assists in analysing the financial statements of businesses in different countries.
Flexibility: Gives more flexibility when presenting financial statements.
Global Acceptance: International investors and regulatory bodies widely accept and recognise IFRS.

Key Differences between GAAP and IFRS

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	Balance Sheet, Income Statement, Statement of Cash Flows, Statement of Stockholders' Equity (often required) and Notes to the Financial Statements	Balance Sheet, Statement of Comprehensive Income, Statement of Cash Flows, and Notes to the Financial Statements

Examples of GAAP and IFR

Example of GAAP

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.

Example of IFRS

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?

Frequently Asked Questions

Who Uses GAAP?

GAAP, or the Generally Accepted Accounting Principles, is mainly applied by companies in the United States. All companies listed on the stock exchange and many private companies in the United States must follow this policy. These standards are usually developed by the Financial Accounting Standards Board (FASB). GAAP helps maintain consistency and clarity in financial reporting, which is essential to investors and regulators of the U.S. market.

Who Uses IFRS?

More than 144 countries employ IFRS, including the EU, Canada, and Australia. This is required for firms operating in these areas and is often used by firms not operating in these regions but would like to attract investors from around the world. The International Accounting Standards Board (IASB) established IFRS to facilitate using a single set of standards for business transactions and make company accounts more easily comparable across national boundaries.

What is the difference between GAAP and IFRS?

The critical difference between GAAP and IFRS lies in the approach toward accounting and financial reporting. While GAAP—majorly adopted by the United States—is more rules-based in that it spells out specific procedures and guidelines to follow in certain circumstances, IFRS is based more on principles. This means IFRS provides general guidance on issues in accounting and, hence, can be interpreted and implemented more liberally, offering you the adaptability you need in your financial statement.

Some of the critical differences identified involve:

Inventory valuation: GAAP allows for LIFO and FIFO methods, while IFRS only permits using FIFO.
Revenue Recognition: GAAP, on the whole, has a more elaborate and criterion-based approach to revenue recognition with variations across industries. On the other hand, IFRS is based on a model known as the principle-based model, in which the basic tenet is the transfer of control over goods or services.
Revaluation of Assets: GAAP generally allows revaluation only in the case of marketable security, while IFRS permits the revaluation of more classes of assets at their current fair value, which includes property, plant, and equipment.

What are the differences between Indian GAAP and the US GAAP?

Indian GAAP refers to the Generally Accepted Accounting Principles applied in India, while US GAAP is used in the United States of America. The key differences are based on their approach and specific guidelines. Indian GAAP is mainly rule-based, so it has a strong tinge of the UK's accounting practices. It places considerable emphasis on historical cost, conservatism, and compliance with the law.

In contrast, US GAAP is a rule-based and detailed standard. The impact of the US legal system on it made it one that aims to provide more clarity and thorough guidance in several accounting scenarios. Therefore, it may change how financial statements are prepared, interpreted, and compared between these two countries.

What are the significant differences between IFRS and Indian GAAP?

The significant dissimilarity between IFRS and Indian GAAP lies at the level of the conceptual framework and in their application. Shortly, IFRS is characterised as principle-based, which means that the emphasis is on the form of transactions rather than with detailed prescriptions and rules under financial reporting. On the other hand, Indian GAAP is essentially rules-based and prescriptive. Key differences pertain to the recognition of revenue, financial instruments, assets, and liabilities. IFRS promotes fair value accounting, while Indian GAAP is biased toward historical cost. The differences significantly change a company's financial reporting, which denotes or even determines the decision-making for investors and stakeholders.

About the Author

Tanya Gupta

Content Writer

A Chartered Accountant by profession and a content writer by passion, I've dedicated my career to unraveling the complexities of GST. With a firm belief that learning is a lifelong journey, I've honed my skills in simplifying intricate legal jargon into easily understandable content. The satisfaction of transforming complex tax laws into relatable narratives is what drives me. Read more

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