GAAP vs IFRS (2024)

Diffen › Business › Accounting

GAAP (US Generally Accepted Accounting Principles) is the accounting standard used in the US, while IFRS (International Financial Reporting Standards) is the accounting standard used in over 110 countries around the world. GAAP is considered a more “rules based” system of accounting, while IFRS is more “principles based.” The U.S. Securities and Exchange Commission is looking to switch to IFRS by 2015.

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.

Objectives of Financial Statements

Both GAAP and IFRS aim to provide relevant information to a wide range of users. However, GAAP provides separate objectives for business entities and non-business entities, while the IFRS only has one objective for all types of entities.

Presentation of Earnings

GAAP emphasizes smooth earning results from year to year, giving investors a view of normalized results. Taxes, for example, are reported based on statutory rates, not on what the company actually paid. They are designed to help investors understand average capital spending and taxation for the company.

Documents

GAAP requires financial statements to include a balance sheet, income statement, statement of comprehensive income, changes in equity, cash flow statement, and footnotes. It is recommended that the balance sheet separates current and noncurrent assets and liabilities, and deferred taxes are included with assets and liabilities. Minority interests are included in liabilities as a separate line item.

Disclosure

Under GAAP, companies are required to disclose information about their accounting choices and their expenses in footnotes.

Intangibles

In GAAP, acquired intangible assets (like R&D and advertising costs) are recognized at fair value, while in IFRS, they are only recognized if the asset will have a future economic benefit and has a measured reliability.

Accounting for Assets

US GAAP defines an asset as a future economic benefit, while under IFRS, an asset is a resource from which economic benefit is expected to flow.

Fixed Assets

Under US GAAP, fixed assets such as property, plant and equipment are valued using the cost model i.e., the historical value of the asset less any accumulated depreciation. IFRS allows another model - the revaluation model - which is based on fair value on the date of evaluation, less any subsequent accumulated depreciation and impairment losses.

The video below compares the treatment of fixed assets under IFRS and GAAP.

Underlying Assumptions

Under the IASB framework (IFRS), underlying assumptions such as accrual and going concern are given more importance. The concept of going concern, especially, is more well-developed in IFRS compared with US GAAP.

How IFRS impacts US companies

While U.S. companies use GAAP and do not directly use IFRS for their SEC filings, IFRS nevertheless impacts them. For example, in cases of global mergers and acquisitions, when they have non-US subsidiaries or non-US stakeholders like investors, customers or vendors. In several such instances, U.S. companies may be required to provide financial information in line with IFRS standards.

The looming transition from GAAP to IFRS will also be challenging for several U.S. companies.