Introduction To IFRS

compare and contrast IFRS VS GAAP

Questions IFRS GAAP
Stands for International Financial Reporting Generally Accepted Accounting
standard principle
Developed by

Adopted by 2001... 1973...

Based on

Inventory method allowed

(LIFO,FIFO,Weighted average)
Inventory reversal

Valuation of fixed asset

(Allowed , prohibited with
exception)

Cost of development
(expensed /capitalized )
How extra ordinary income
treated
(segregated/ blended)
Disclosure
(more or fewer lines)

Criteria/Item Meaning
About standard-setting
Issuing body
boards
Revenue
It usually refers to public
recognition-Long
construction contracts.
term contracts
It is unusual and infrequent.
Extraordinary items Shown net of taxes below
discontinued operations
Property, Plant, and
Tangible fixed assets
Equipment
Property which is not used
Investment property in regular operations of the Purely and IFRS concept. recognize this
company
Those assets which cannot Reported using cost or
Intangible assets
be seen or touched
Assumes newest goods are
sold first, and the oldest
LIFO (Last In, First
goods that were purchased Prohibited under IFRS
Out)
remain so including
beginning inventory.
Certain revaluation and
Measurement of
measurement are required is a subsequent recovery in write up is allowed if
Inventory Value
for inventory regularly.
Refers to expenses incurred
for research and
Research and
development to create
development costs
innovative products and
services;
During construction, certain Interests in short term
Capitalization of
costs are capitalized as part lending are offset against
interest costs
of asset costs.
Where each component is
Component method isolated and depreciated
of depreciation separately rather than as a
whole
IFRS GAAP
International Financial Generally Accepted
Reporting Standards Accounting Principles
Financial Accounting
International Accounting
Standards Board
Standards Board (IASB)
(FASB)
Revenue is considered
only under the
Revenue will equal the cost.
completed contract
method.
IFRS prohibits such
Allowed under GAAP
classification
Can be reported using either
GAAP does not allow
the cost model or the
the revaluation model
revaluation model
GAAP does not
category
GAAP does not allow
revaluation model revaluation model
Only allowed under
US GAAP;
Considers lower of cost or Considers lower of
net realizable value: If there cost or market: No,
value, then inventory can be there is a recovery in
written up; value;
GAAP requires both
Research costs are
research and
expenses as incurred, and
development costs to
developmental costs are
be expensed as
capitalized;
incurred;
Such offsets are not
allowed under
capitalized costs. GAAP.;
GAAP also allows the
IFRS requires companies to component method of
use the component method depreciation but is
of depreciation seldom used in
practice

Criteria/Item It refers toMeaning
an alternative
method used for periodic
Revaluation model
valuation and reporting of
long-lived assets.
About the method of
Investment property
valuation
IFRS GAAP
IFRS permits the use of GAAP prohibits the
either the cost model or the use of the revaluation
revaluation model model
Under IFRS, Companies are
allowed to measure Under GAAP,
investment property by Investment properties
either using a cost model or are measured using
fair value accounting the cost model.
model.

The key differences between GAAP and IFRS include:

GAAP is a framework based on legal authority while
IFRS is based on a principles-based approach.
GAAP is more detailed and prescriptive while
IFRS is more high-level and flexible.
GAAP requires more disclosures while IFRS requires fewer disclosures.

What are the differences between GAAP and IFRS?

While GAAP and IFRS both pertain to how financial documents are structured and filed, there are
significant differences. The two main distinctions are:
 Enforcement. GAAP is rule-based, meaning publicly traded US companies are lawfully
required to follow its directives. On the other hand, IFRS is standard-based, meaning no one is
required to follow its guideline—though it’s recommended. As a result, the theoretical
framework and principles of IFRS leave more room for interpretation and sometimes require
lengthy disclosures on financial statements.
 Source and scope. GAAP is US-based, while IFRS is used worldwide. The IASB, which sets
IFRS, is globally influential; its accounting standards are adapted to accounting rules in
countries worldwide. The US, where the Securities and Exchange Commission requires
American companies to use GAAP when preparing their financial statements, is the only
exception.
There are other notable differences in how GAAP and IFRS handle specific elements of various
financial documents, including:
1. Inventory valuation methods
Inventory valuation is figuring out how much your inventory is worth. There are three standard
accounting methods for doing this: the first in, first out (FIFO) method, which assumes that the first (or
oldest) items in your inventory will be the first to sell; the last in, first out (LIFO) method, which
assumes that the last (or newest) items in your inventory will be the first to sell; and the weighted
average method, which uses the amount earned from selling a portion of your inventory to determine
the value of the remaining portion.
Here’s how GAAP and IFRS differ when it comes to inventory valuation methods:
 GAAP. GAAP allows companies to use any of the three inventory valuation methods. When
using FIFO, GAAP uses “net asset value”—the total value of a company’s assets minus the total
value of its liabilities—to determine inventory valuation.
 IFRS. IFRS allows the FIFO and weighted average method but does not allow the LIFO
method, because LIFO can be manipulated to distort a company’s earnings to lower tax liability.
When using FIFO, IFRS uses “net realizable value,” which considers how much an asset might
generate when sold, minus an estimate of costs, fees, and taxes associated with the sale.

2. Cash flow statement

A cash flow statement is a financial statement that shows precisely how cash and cash equivalents enter
and exit a business over a specific reporting period. GAAP and IFRS handle cash flow statements
differently, particularly in how they classify interest and dividends:
 GAAP. With GAAP, interest paid and received, and received dividends are listed under the
operating section, while dividends paid are listed in the financing section.
 IFRS. With IFRS, all interest and dividends can be listed under the operating or financing
section.

3. Balance sheet
A balance sheet is a financial statement that summarizes a company’s assets, liabilities, and shareholder
equity at a given point in time. It’s essential to know how to organize your balance sheet so that your
investors and other interested parties can quickly and accurately read it. GAAP and IFRS differ in how
categories are arranged on a balance sheet:
 GAAP. GAAP requires assets in order of liquidity, with the most liquid assets listed first—that
is, current assets, non-current assets, current liabilities, non-current liabilities, and owners’
equity.
 IFRS. IFRS suggests putting assets in the opposite order of liquidity, with the least liquid assets
listed first—that is, non-current assets, current assets, owners’ equity, non-current liabilities, and
current liabilities.

4. Asset revaluation
The value of a company’s assets may fluctuate over a given period, meaning they need to be re-
evaluated (i.e., reappraised). Asset revaluation is crucial because it can help you save for replacement
costs of fixed assets once they’ve run through their useful lives, and gives investors a more accurate
understanding of your business. Asset revaluation can also reduce your debt-to-equity ratio, which can
paint a healthier financial picture of your company.
GAAP and IFRS have different approaches to asset revaluation:
 GAAP. GAAP only allows the revaluation of fair market value for marketable securities (i.e.,
investments and stocks).
 IFRS. IFRS allows for the revaluation of more assets, including plant, property, and equipment
(PPE), inventories, intangible assets, and investments in marketable securities.

5. Inventory write-down reversals

A company’s inventory may lose value over time. An asset may, for example, lose value because of
market or technological factors, which classifies it as a “loss on impairment.” GAAP and IFRS require
that businesses write down their inventory as soon as its cost exceeds its net realizable value (i.e., how
much the inventory is expected to generate when sold).
While a loss is often permanent, the value of an asset may increase again if the impairing factor is no
longer present. GAAP doesn’t allow companies to re-evaluate the asset to its original price in these
cases. In contrast, IFRS allows some assets to be evaluated up to their original price and adjusted for
depreciation.

6. Development costs
In accounting, development costs are the internal costs of developing intangible assets—assets with no
physical form, like patents, intellectual property, and client relationships. GAAP considers these
expenses, while IFRS allows companies to capitalize and amortize them over multiple periods. Your
accounting standard, therefore, determines where on your financial documents you must list intangible
assets and affects your balance sheet’s final balance.
Major differences between IFRS and GAAP
accounting
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).
U.S. Generally Accepted Accounting Principles (GAAP) is only used in the United States. GAAP is
established by the Financial Accounting Standards Board (FASB).
Let’s look at the 10 biggest differences between IFRS and GAAP accounting.
#1: Local vs. Global
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 hand, is only used in the United States. Companies that
operate in the U.S. and overseas may have more complexities in their accounting.
#2: Rules vs. Principles
GAAP tends to be more rules-based, while IFRS tends to be more principles-based. Under GAAP,
companies may have industry-specific rules and guidelines to follow, while IFRS has principles that
require judgment and interpretation to determine how they are to be applied in a given situation.
However, convergence projects between FASB and IASB have resulted in new GAAP and IFRS
standards that share more similarities than differences. For example, the recent GAAP standard for
revenue from contracts with customers, Auditing Standards Update (ASU) No. 2014-09 (Topic
606) and the corresponding IFRS standard, IFRS 15, share a common principles-based approach.
#3: Inventory Methods
Both GAAP and IFRS allow First In, First Out (FIFO), weighted-average cost, and specific
identification methods for valuing inventories. However, GAAP also allows the Last In, First Out
(LIFO) method, which is not allowed under IFRS. Using the LIFO method may result in artificially low
net income and may not reflect the actual flow of inventory items through a company.
#4: Inventory Write-Down Reversals
Both methods allow inventories to be written down to market value. However, if the market value later
increases, only IFRS allows the earlier write-down to be reversed. Under GAAP, reversal of earlier
write-downs is prohibited. Inventory valuation may be more volatile under IFRS.
#5: Fair Value Revaluations
IFRS allows revaluation of the following assets to fair value if fair value can be measured reliably:
inventories, property, plant & equipment, intangible assets, and investments in marketable securities.
This revaluation may be either an increase or a decrease to the asset’s value. Under GAAP, revaluation
is prohibited except for marketable securities.
#6: Impairment Losses
Both standards allow for the recognition of impairment losses on long-lived assets when the market
value of an asset declines. When conditions change, IFRS allows impairment losses to be reversed for
all types of assets except goodwill. GAAP takes a more conservative approach and prohibits reversals
of impairment losses for all types of assets.
#7: Intangible Assets
Internal costs to create intangible assets, such as development costs, are capitalized under IFRS when
certain criteria are met. These criteria include consideration of the future economic benefits.
Under GAAP, development costs are expensed as incurred, with the exception of internally developed
software. For software that will be used externally, costs are capitalized once technological feasibility
has been demonstrated. If the software will only be used internally, GAAP requires capitalization only
during the development stage. IFRS has no specific guidance for software.
#8: Fixed Assets
GAAP requires that long-lived assets, such as buildings, furniture and equipment, be valued at historic
cost and depreciated appropriately. Under IFRS, these same assets are initially valued at cost, but can
later be revalued up or down to market value. Any separate components of an asset with different
useful lives are required to be depreciated separately under IFRS. GAAP allows for component
depreciation, but it is not required.
#9: Investment Property
IFRS includes the distinct category of investment property, which is defined as property held for rental
income or capital appreciation. Investment property is initially measured at cost, and can be
subsequently revalued to market value. GAAP has no such separate category.
#10: Lease Accounting
While the approaches under GAAP and IFRS share a common framework, there are a few notable
differences. IFRS has a de minimus exception, which allows lessees to exclude leases for low-valued
assets, while GAAP has no such exception. The IFRS standard includes leases for some kinds of
intangible assets, while GAAP categorically excludes leases of all intangible assets from the scope of
the lease accounting standard.
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.