The Big Debate - GAAP Vs. IFRS

IFRS and US GAAP - Similarities and Differences

What is IFRS? And what is GAAP? The main difference between IFRS and US GAAP is that GAAP is rule-based, while IFRS is principle-based. The difference mainly lies in the methodology used to evaluate an accounting treatment. Under GAAP, the research focuses more on the literature, while under IFRS the “facts pattern” is rigorously reviewed.

IFRS GAAP Differences

Much like the transition from the US system of weights and measures to the international metric system, GAAP (Generally Accepted Accounting Principles), an accounting standard used in the US, is slowly, but surely converging with IFRS (International Financial Reporting Standards), an accounting standard used across 110 countries globally.
The US Financial Accounting Standards Board (FASB) that endorses GAAP (or US GAAP), and the International Accounting Standards Board (IASB) that defines IFRS have both been working steadily towards convergence for a few years now. The convergence process is designed to figure out the significant differences between IFRS and US GAAP that need improvement. However, some differences will still continue to exist between the two systems.

Comparison between IFRS and GAAP

The differences in the IFRS and GAAP accounting systems have a considerable impact on the financial statements, and consequently on the conduct of businesses. Some of the most common differences found in present practice are:

GAAP

IFRS

Key Characteristics

Relevance, reliability, comparability and understandability, are the ley characteristics in GAAP (in the exact hierarchy) where relevance and reliability are primary qualities, comparability is secondary and understandability is considered as user-specific quality

Relevance, reliability, comparability and understandability are also the key characteristics in IFRS. However, according to IASB framework (IFRS) its decision is not based upon individual users’ specific circumstances

Consolidation

Prefers a risks-and-rewards model

Prefers a control model

Inventory

LIFO or FIFO can be used

LIFO cannot be used

Statement of Income

Extraordinary items are shown below the net income

Extraordinary items not shown segregated

Required Documents in Financial Statements

Balance sheet, income statement, statement of comprehensive income, changes in equity, cash flow statement, footnotes

Balance sheet, income statement, changes in equity, cash flow statement, footnotes

Earning-per-share

Computation averages the individual interim period incremental costs

Calculation does not average the individual interim period calculations

Development Costs

Costs are considered as “expenses”

Costs can be capitalized if key criteria are met

Debt and Financial Liability

Equity instruments are treated as such

Equity instruments are treated as debt

Required Period

3 years of comparative financial information is required

Only 1 years’ worth of financial information is required

Performance Elements

Assets or liabilities, comprehensive income, gains, revenue or expenses, losses

Assets or liabilities, revenue or expenses,

Convergence Hiccups

Although, US is clearly moving toward IFRS, a recent SEC (United States Securities and Exchange Commission) staff report seems to suggest some ambiguity in the timeline of its implementation. The staff report does not talk about whether US public companies should have the option to move to IFRS voluntarily, but, it seems to suggest that companies should not be allowed to adopt IFRS early, because it would compromise comparability with US companies using GAAP