GAAP Vs IFRS: What’s The Difference?

The cost model takes into account the historical value of an asset minus any accumulated depreciation. IFRS allows a different model for fixed assets called the revaluation model, which is based on the fair value at the current date minus any accumulated depreciation and impairment losses. Both standards use statements of cash flows, balance sheets, and income statements. They also offer the same guidelines when organizations deal with cash and cash equivalents. Plus, their preparation of financial statements follows the same accrued-based approach, and both can recognize revenue when it is realizable.

While GAAP itself has no such requirement, SEC registrants must follow specific rules, which include functional categories and specific line item descriptions. IFRS is used in more than 110 countries around the world, including the EU and many Asian and South American countries. GAAP, on the other https://www.bookstime.com/articles/gaap-vs-ifrs hand, is only used in the United States and few more countries in US regime. Internal costs to create intangible assets, such as development costs, are capitalized under IFRS when certain criteria are met. Accounting for the flow of inventory is another area where the two sets of standards differ.

IFRS vs. GAAP: Valuation of Assets

In the IFRS setting, investment property is property held for appreciation or for rental. Investment property can be recorded at fair value as long as the fair value can be measured reliably and without undue cost or effort. Adjustments to fair value typically run through the profit loss accounts rather than through equity accounts. Both US GAAP and IFRS allow different types of non-standardized metrics (e.g. non-GAAP or non-IFRS measures of earnings), but only US GAAP prohibits the use of these directly on the face of the financial statements.

The following differences outlined in this section affect what financial information is presented, how it is presented, and where it is presented. Generally, IFRS is described as more principles-based whereas US GAAP is described as more rules-based. While there are examples to support these descriptions, there are also meaningful exceptions that make this distinction not very helpful. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.

Inventory Reversal

And both rules are the same for the determination of useful lives and salvage value. Both sets of rules employ the “matching concept” of recording depreciation, and IFRS states that depreciation does not stop during an idle period except when using the units of production method. GAAP also includes this provision, except there are rules for asset impairments, disclosure and useful life. An entity is required to disclose the idle asset by setting up a separate account for it on the balance sheet, writing a note disclosure as to why it is idle, and adjusting the useful life if it has changed.

Though efforts to converge the two standards and how financial information is reported are underway, financial analysts must be cautious about the differences when attempting to analyze financial reports. The frameworks do go a long way toward setting up standards in keeping financial reporting consistent regardless of which accounting system is used. Financial reporting helps to facilitate comparison between companies to provide both cross-sectional time-series analysis. Good financial reporting seeks to give sufficient financial information about the reporting entity so it is useful to lenders, potential investors, creditors, stakeholders, etc. Because of this, standard-setting bodies set out to provide comprehensive and transparent financial statement presentations.

Objectives of Financial Statements

US GAAP lists assets in decreasing order of liquidity (i.e. current assets before non-current assets), whereas IFRS reports assets in increasing order of liquidity (i.e. non-current assets before current assets). Understanding these differences between IFRS and GAAP accounting is essential for business owners operating internationally. Investors and other stakeholders need to be aware of these differences so they can correctly interpret financials under either standard.

If neither ledger is designated, transactions are recorded in both places. Finally, one of the main differentiating factors between IFRS and GAAP is the qualitative characteristics of how the accounting methods function. GAAP works within a hierarchy of characteristics, such https://www.bookstime.com/ as relevance, reliability, comparability, and understandability, to make informed decisions based on user-specific circumstances. IFRS also works with the same characteristics, with the exception that decisions cannot be made on the specific circumstances of an individual.

GAAP vs. IFRS

We live in an increasingly global economy, so it’s important for business owners and accounting professionals to be aware of the differences between the two predominant accounting methods used around the world. International Financial Reporting Standards (IFRS) – as the name implies – is an international standard developed by the International Accounting Standards Board (IASB). Generally Accepted Accounting Principles (GAAP) is only used in the United States. GAAP is established by the Financial Accounting Standards Board (FASB). The treatment of land as an asset has some similarities between the two sets of rules, but also some differences in approach. GAAP, however, states that the cost of demolishing an existing building, clearing and leveling the land and other similar costs are added to the value of the land and are not depreciated.