GAAP vs. IFRS: An Overview

Each country sets its own standards for financial reporting. In the United States, accountants follow the generally accepted accounting principles (GAAP) when they compile fina𝓡ncial statements. Outside the U.S., many countries follow the International Financial Reporting Standards (IFRS), which aims to establish a common global language for company accounting.

About 160 jurisdictions have made a public commitment to IFRS reporting standards, and 147 require publicly listed entities to follow IFRS accounting standards. While the U.S. Securities and Exchange Commission (SEC) has openly expressed a desire to switch from GAAP to IFRS, development has been slow.

GAAP

In the United States, if a company distributes its financial statements outside of the company, it must follow 澳洲幸运5官方开奖结果体彩网:generally ac🍎cepted accounting🦄 principles, or GAAP. If a corporation's stock is publicly traded, financial statements must also adhere to rules established by the U.S. Securities and Exchange Commission.

GAAP addresses such things as revenue recognition, balance sheet, item classification, and outstanding share measurements. 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.

IFRS

International Financial Reporting Standards (IFRS𒊎) are issued by the International Accounting Standards Board (IASB), and they specify exactly how accountants must maintain and report their accounts. IFRS was established in order to have a common accounting language, so businesses and accounts can be understood from company to company and country to country.

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.

IFRS is standard in the European Union (EU) and many countries in Asia and South America, but not in the United States. 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. 

Key Differences

The primary difference between the two systems is that GAAP is rules-based and IFRS is principles-based. This difference appears in specific details and inter꧃pretations.

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. On the other hand, the consistent and intuitiv🐻e principles of IFRS are more logically sound and may possibly better represent the economics of business transactions.

Perhaps the most notable 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.

Investing

When a company holds investments such as shares, bonds, or der🌳ivatives 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.

Explain Like I'm Five

Each country sets its own standards for financial reporting. Much like the metric system, these standards ensure that accountants follow a uniform set of rules when they record a company's revenues, expenses, profits, and losses.

For most of the world, accountants follow the IFRS rules. In the United States, the leading standard is called GAAP. Although there have been some discussions of transitioning the U.S. to the IFRS standard, there is little likelihood of that happening in the near future.

The Bottom Line

Any company that distributes financial statements publicly should use some form of 🍎established accounting principles. Two common ones ar🍰e GAAP and IFRS.

In the United States, generally accepted accou💃nting principles, or GAAP, are used by businesses with public financial disclosures. This system uses rules-based accounting. However, many countries are adopting the use of International Financial Reporting Standards, or IFRS, as an established international accounting system.

IFRS is principles-based and may require lengthy disclosures in order to properly explain financial statements. It is the established system in the European Union (EU) and many Asian and South American countries. It has not yet been adopted as an official system in the United States. However, any company that does a large amount of international business may need to use IFRS reporting on its financial disclosures 澳洲幸运5官方开奖结果体彩网:in addition to GAAP.