CORPORATE FINANCE ACCOUNTING

GAAP vs. IFRS: What's the

Difference?
By SEAN ROSS Updated June 27, 2022

Reviewed by DAVID KINDNESS

Fact checked by VIKKI VELASQUEZ

GAAP vs. IFRS: An Overview

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
(FASB) and organized within the framework of the
generally accepted accounting principles (GAAP).
[1] Generally accepted accounting principles refer

to a common set of accepted accounting

principles, standards, and procedures that
companies and their accountants must follow
when they compile their financial statements. [2]

International Financial Reporting Standards

(IFRS) are a set of international accounting
standards, which state how particular types of
transactions and other events should be reported
in financial statements. IFRS are issued by the
International Accounting Standards Board (IASB),
and they specify exactly how accountants must
maintain and report their accounts. [3] IFRS was
established in order to have a common accounting
language, so business and accounts can be
understood from company to company and
country to country. [4]

More than 144 countries around the world have

adopted IFRS, which aims to establish a common
global language for company accounting affairs. [5]
While the Securities and Exchange Commission
(SEC) has openly expressed a desire to switch from
GAAP to IFRS, development has been slow. [6]

KEY TAKEAWAYS
GAAP is a common set of accepted
accounting principles, standards, and
procedures that companies and their
accountants must follow when they
compile their financial statements.
GAAP stands for Generally Accepted
Financial Practices, and it's based in the
U.S.
IFRS is a set of international accounting
standards, which state how particular
types of transactions and other events
should be reported in financial
statements.
Some accountants consider methodology
to be the primary difference between the
two systems; GAAP is rules-based and
IFRS is principles-based.
Recently, there have been some efforts to
transition all financial reporting to the
IFRS standard.

GAAP
If a company distributes its financial statements
outside of the company, GAAP must be followed.
[2] If a corporation's stock is publicly traded,

financial statements must also adhere to rules

established by the U.S. Securities and Exchange
Commission. [7]

GAAP addresses such things as revenue

recognition, balance sheet, item classification, and
outstanding share measurements. [8] If a financial
statement is not prepared using GAAP, investors
should be cautious. Also, some companies may
use both GAAP- and non-GAAP-compliant
measures when reporting financial results. GAAP
regulations require that non-GAAP measures are
identified in financial statements and other public
disclosures, such as press releases. [9]

IFRS
The point of IFRS is to maintain stability and
transparency throughout the financial world. IFRS
enables the ability to see exactly what has been
happening with a company and allows businesses
and individual investors to make educated
financial decisions. [4]

IFRS is standard in the European Union (EU) and

many countries in Asia and South America, but not
in the United States. [10] The Securities and
Exchange Commission won't switch to
International Financial Reporting Standards in the
near term but will continue reviewing a proposal
to allow IFRS information to supplement U.S.
financial filings. [11]  

FAST FACT
Countries that benefit the most from the
standards are those that conduct a lot of
international business and investing.

Key Differences
The primary difference between the two systems
is that GAAP is rules-based and IFRS is principles-
based. This disconnect manifests itself in specific
details and interpretations. Basically, IFRS
guidelines provide much less overall detail than
GAAP. Consequently, the theoretical framework
and principles of the IFRS leave more room for
interpretation and may often require lengthy
disclosures on financial statements. [12] On the
other hand, the consistent and intuitive principles
of IFRS are more logically sound and may possibly
better represent the economics of business
transactions.

Perhaps the most notable specific difference

between GAAP and IFRS involves their treatment
of inventory. IFRS rules ban the use of last-in, first-
out (LIFO) inventory accounting methods. GAAP
rules allow for LIFO. Both systems allow for the
first-in, first-out method (FIFO) and the weighted
average-cost method. GAAP does not allow for
inventory reversals, while IFRS permits them
under certain conditions. [13]

Some Key Differences Between IFRS and GAAP

What Is the Difference Between the

IASB and FASB?
The International Accounting Standards Board
(IASB), founded in 2001 and based in Canary Wharf
(England) oversees and updates the International
Financial Reporting Standards (IFRS). [14] The
Financial Accounting Standards Board (FASB)
establishes and updates the accounting rules for
the GAAP standard in the U.S. [1]

What Is the Difference in Accounting for

Investments Using U.S. GAAP vs IFRS?
When a company holds investments such as
shares, bonds, or derivatives on its balance sheet,
it must account for them and their changes in
value. Both GAAP and IFRS require investments to
be segregated into discrete categories based on
asset type. The main differences come in
recognizing income or profits from an investment:
under GAAP it's largely dependent on the legal
form of the asset or contract; under IFRS the legal
form is irrelevant and only depends on when cash
flows are received. [15]

Which Is Better: IFRS or GAAP?

This is a matter of perspective. IFRS is more
principles-based, while GAAP is rules-based. A
focus on principles may be more attractive to
some as it captures the essence of a transaction
more accurately. In practice, however, since much
of the world uses the IFRS standard, a convergence
to IFRS could have advantages for international
corporations and investors alike.

How Are Expenditures Related to

Research & Development Treated Under
U.S. GAAP vs. IFRS?
Research & development, or R&D, is a large
expense in many industry sectors. Under GAAP
R&D expenses are booked as they occur. This is
true under IFRS as well, however, IFRS also
requires certain R&D expenditures to be
capitalized (e.g. some internal costs like
prototyping).

ARTICLE SOURCES

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Related Terms
GAAP: Understanding It and the 10
Key Principles
GAAP is a common set of generally accepted accounting
principles, standards, and procedures. U.S. public
companies must follow GAAP for their financial
statements. more

What Are International Financial

Reporting Standards (IFRS)?
International Financial Reporting Standards (IFRS) are a
set of accounting rules currently used by public
companies in 166 jurisdictions. more

Understanding International
Accounting Standards (IAS)
International Accounting Standards (IAS) were a set of
rules for financial reporting that were replaced in 2001
by International Financial Reporting Standards (IFRS).
more

What Are Accounting Policies and

How Are They Used? With Examples
Accounting policies are the specific principles and
procedures implemented by a company's management
that are used to prepare financial statements. more

Accounting Principles Explained: How

They Work, GAAP, IFRS
Accounting principles are the rules and guidelines that
companies must follow when reporting financial data.
more

NRV: What Net Realizable Value Is and

a Formula To Calculate It
Net realizable value (NRV) is the value of an asset that
can be realized upon its sale, minus a reasonable
estimation of the costs involved in selling it. more

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