Difference between IFRS and GAAP
Basis |
IFRS |
GAAP |
---|---|---|
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. |
Difference between IFRS and GAAP
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.