IFRS (International Financial Reporting Standards) and GAAP (Generally Accepted Accounting Principles) are two different sets of accounting standards used globally. IFRS improves transparency, and consistency in financial reporting around the world making it simpler and easier for the investor to compare financial statements from different countries; whereas, GAAP are the rules and guidelines that companies follow to make their financial statements. GAAP makes sure that all companies report their financial info in the same way so that it’s easier to compare them.
What is IFRS?
IFRS stands for International Financial Reporting Standards. It is a set of accounting standards developed by the International Accounting Standards Board (IASB), an independent international organization. IFRS is designed to provide a common language for business entities’ financial reporting, making financial statements transparent, comparable, and understandable across different countries and industries.
- Global Applicability: IFRS is used by companies in over 140 countries, making it the most widely accepted global accounting framework. Many countries, especially Europe, Asia, and South America, have adopted IFRS for financial reporting.
- Principles-Based Approach: IFRS follows a principles-based approach, providing a conceptual framework with broad principles rather than detailed rules. This approach allows for flexibility in application and interpretation.
- Standards and Interpretations: IFRS includes a set of standards, interpretations, and framework documents that cover various aspects of financial reporting, including revenue recognition, financial instruments, leases, and insurance contracts.
What is GAAP?
GAAP stands for Generally Accepted Accounting Principles. It is a set of accounting standards, principles, and procedures used in the United States for financial reporting. These principles provide a framework for how financial statements should be prepared and presented to ensure consistency, comparability, and transparency.
- Applicability: GAAP is primarily used in the United States, and it is required for financial reporting by U.S. publicly traded companies. Private companies and non-profit organizations in the U.S. may also follow GAAP.
- Principles and Concepts: GAAP includes underlying principles and concepts, such as the matching principle, revenue recognition principle, and historical cost principle, that guide the preparation of financial statements.
- Consistency and Comparability: GAAP aims to provide consistency and comparability in financial reporting, allowing users to analyze and compare financial statements of different companies within the U.S.
Difference between IFRS and GAAP
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Basis |
IFRS |
GAAP |
|---|---|---|
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Definition |
IFRS is developed by the International Accounting Standards Board (IASB). It is a set of international accounting standards that provides a common global language for business affairs. |
Generally Accepted Accounting Principles is the set of accounting standards used in the United States. It is a framework of accounting guidelines, rules, and procedures. |
|
Authority |
It is issued by an independent international standard-setting body, named International Accounting Standards Board (IASB), |
It is established by various standard-setting bodies in the United States, including the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC). |
|
Principles and Rules |
It is generally based on principles, providing conceptual frameworks and broad guidelines, which allows for more interpretation. |
They are often rule-based, providing specific guidelines and detailed rules for various accounting transactions. |
|
Applicability |
It is used globally, with many countries adopting or converging towards IFRS. |
It is primarily used in the United States. |
|
Inventory Valuation |
It permits the use of the Last In First Out (LIFO) method for inventory valuation but is not commonly used. |
It permits the use of LIFO for inventory valuation, which is a significant difference from IFRS. |
|
Approach |
It is principles-based approach, focusing on the substance of the transaction rather than its legal form. |
It is mix of principles-based and rules-based approaches, with a greater emphasis on specific rules for various transactions. |
|
Treatment of Goodwill |
It requires an annual impairment test for goodwill, allowing for the reversal of impairment losses under certain conditions. |
It requires an annual impairment test for goodwill but does not allow for the reversal of impairment losses. |
|
Presentation of Financial Statements |
It follows a statement of financial position, statement of comprehensive income, statement of changes in equity, and statement of cash flows. |
It follows a balance sheet, income statement, statement of retained earnings, and statement of cash flows. |
|
Treatment of Research and Development Costs |
It allows capitalization of certain development costs under specific conditions. |
In this, generally, research costs are expensed, and development costs are capitalized if certain criteria are met. |
IFRS and GAAP – FAQs
Who sets the standards for IFRS?
The International Accounting Standards Board (IASB), an independent international organization, is responsible for setting and maintaining IFRS.
Is IFRS more suitable for certain industries?
IFRS aims to be applicable across industries, but certain industries may have specific guidance within the standards.
What is the role of the FASB in GAAP?
The Financial Accounting Standards Board (FASB) is an independent, private-sector organization that sets accounting standards in the U.S. It operates under the oversight of the Financial Accounting Foundation (FAF).
Are there specific GAAP standards for different industries?
GAAP provides industry-specific guidance for certain transactions and industries. For example, there are specific standards for banks, insurance companies, and not-for-profit organizations.
Can a company use both IFRS and GAAP?
While companies generally choose to use either IFRS or GAAP for their financial reporting, some multinational companies may need to reconcile financial statements using both sets of standards for different reporting purposes.