IFRS vs GAAP Differences

December 30, 2020

gaap vs ifrs

However, for private companies applying US GAAP, it’s a different story. Many of these companies are grappling with the transitional and other requirements of Topic 842 as it becomes effective for them this year. Private companies that are dual reporters have added challenges because of differences between IFRS 16 and Topic 842. With that backdrop, this is a good time to revisit where we stand in terms of differences between IFRS Standards and US GAAP, as they relate to lessees.

gaap vs ifrs

Prior to returning to his home state of Massachusetts and joining HBS Online, he lived in North Carolina, where he held roles in news and content marketing. He has a background in video production and previously worked on several documentary films for Boston’s PBS station, WGBH. In his spare time, he enjoys running, exploring New England, and spending time with his family. LIFO, or Last In First Out, takes the opposite approach of FIFO.

Difference Between US GAAP vs IFRS

In the United States, foreign listed companies may use IFRS and are no longer required to reconcile their financial statements with GAAP. Systems of accounting, or accounting standards, are guidelines and regulations issued by governing bodies. They dictate how a company records its finances, how it presents its financial statements, and how it accounts for things such as inventories, depreciation, and amortization. The standards that govern financial reporting and accounting vary from country to country. In the United States, financial reporting practices are set forth by the Financial Accounting Standards Board and organized within the framework of the generally accepted accounting principles . For preparers applying IFRS Standards and public companies applying US GAAP, lease accounting has been business as usual for a few years now under IFRS 161and Topic 8422.

Does the US use GAAP or IFRS?

United States

No. Domestic public companies must use US GAAP. Permitted. Currently, more than 500 foreign SEC registrants, with a worldwide market capitalisation of US$7 trillion, use IFRS Standards in their US filings.

International Financial Reporting Standards are a set of accounting rules currently used by public companies in 166 jurisdictions. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. https://www.bookstime.com/ We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy. Perhaps the most notable specific difference between GAAP and IFRS involves their treatment of inventory.


The SEC feels that GAAP offers a better framework for financial and accounting reporting. They observe that IFRS’s flexibility leaves things open to interpretation and judgment, and may not promote a standard and consistent framework for reporting financials. There is no clear winner as everything depends on the intended use. GAAP offers a rules-based gaap vs ifrs scenario, while IFRS is more about principles. IFRS will work for organizations looking to capture their transactions more accurately. GAAP is better suited for US-based businesses that need to meet the country’s compliance norms and regulations. IFRS allows interest paid to be placed in the financing or operating section of cash flow statements.

  • Under GAAP, the accounting process is prescribed highly specific rules and procedures, offering little room for interpretation.
  • Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.
  • Although we have seen moderate convergence of US GAAP and IFRS in the past, the likelihood of a single set of international standards being adopted in the near term remains very low.
  • They are United States of America General Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards .
  • GAAP is better suited for US-based businesses that need to meet the country’s compliance norms and regulations.

Under IFRS, costs in the research phase are expensed as incurred. Costs in the development phase may be capitalized based on certain factors. On the other hand, US GAAP generally requires immediate expensing of both research and development expenditures, although some exceptions exist.

The Key Differences Between GAAP vs. IFRS

What follows is an overview of the differences between the accounting frameworks used by GAAP and IFRS. This is at a broad, framework level; differences in accounting treatments for individual cases may also be added as this gets updated. Debts that the company expects to repay within the next 12 months are classified as current liabilities, while debts whose repayment period exceeds 12 months are classified as long-term liabilities. For contracts, revenue is recognized based on the percentage of the whole contract completed, the estimated total cost, and the value of the contract. The amount of revenue recognized should be equal to the percentage of work that has been completed.

  • Prior to returning to his home state of Massachusetts and joining HBS Online, he lived in North Carolina, where he held roles in news and content marketing.
  • US GAAP and IFRS are the two predominant accounting standards used by public companies, but there are differences in financial reporting guidelines to be aware of.
  • There are many similarities in preparing financial statements under GAAP and IFRS.
  • Although, US is clearly moving toward IFRS, a recent SEC staff report seems to suggest some ambiguity in the timeline of its implementation.
  • Extraordinary ItemsExtraordinary Items refer to those events which are considered to be unusual by the company as they are infrequent in nature.
  • Solving GAAP vs. IFRS, other accounting challenges with SAP SAP ERP products can help users with international accounting challenges like GAAP vs. IFRS.
  • The IASB does not set GAAP, nor does it have any legal authority over GAAP.

Reporting differences with respect to the process and amount by which we value an item on the financial statements also applies to inventory, fixed assets and intangible assets. IFRS shows how companies should prepare and disclose their financial statements and serves to provide a worldwide framework but does not dictate how the reporting should be done specifically. GAAP combines acceptable ways of recording and reporting monetary data and authoritative principles set by policy boards. The convergence of IFRS and GAAP to create a single set of accounting standards for worldwide use has been taking place, in some form, for decades. Efforts to reduce the differences between GAAP and IFRS are ongoing. However, we’re still some distance from the US Securities and Exchange Commission actually making the switch from GAAP to IFRS.

Can US companies use IFRS instead of GAAP?

The first item will be current assets, followed by non-current assets, then current liabilities. Assets are listed at the beginning to make their conversion to cash more convenient.

Generally Accepted Accounting Principles (GAAP) – Forbes Advisor – Forbes

Generally Accepted Accounting Principles (GAAP) – Forbes Advisor.

Posted: Fri, 09 Sep 2022 07:00:00 GMT [source]