IFRS vs GAAP: What’s the Difference?

23 Dec 2021

gaap vs ifrs

Companies enjoy some leeway to make different interpretations of the same situation. The IASB does not set GAAP, nor does it have any legal authority over GAAP. The IASB can be thought of as a very influential group of people who are involved in debating and making up accounting rules. However, a lot of people actually do listen to what the IASB has to say on matters of accounting. Inventories can be written down at market value, just like in IFRS, but GAAP does not allow for the reversal of the prices if they fluctuate. Even revaluation of assets is prohibited under GAAP unless there are marketable securities (assets that can easily be liquified).

  • Helping clients meet their business challenges begins with an in-depth understanding of the industries in which they work.
  • This report serves the investors to make rational and economically sound decisions; analyse the financial situation of the company and decide if they should invest in it.
  • IFRS is principles based, so that general guidelines are set forth, and users are expected to use their best judgment in following the principles.
  • GAAP doesn’t allow companies to re-evaluate the asset to its original price in these cases.
  • The financial world utilizes reports like the IFRS and the GAAP to provide information on the working and progress of a company.
  • In the US, under GAAP, all of these approaches to inventory valuation are permitted, while IFRS allows for the FIFO and weighted average methods to be used, but not LIFO.

Up until 1998, TSAI had employed conservative revenue recognition practices and only recorded revenues from agreements when the customers were billed through the course of the 5-year agreement. But once sales began to decline, TSAI changed its revenue recognition practices to record approximately 5 years’ worth of revenues upfront. A classic example of revenue recognition manipulation that we discussed in our Accounting https://intuit-payroll.org/accounting-for-startups-7-bookkeeping-tips-for/ Crash Course was software-maker Transaction Systems Architects (TSAI). In addition, IFRS requires separate depreciation processes for separable components of PP&E. For US GAAP, all property is included in the general category of Property, Plant and Equipment (PP&E). Under IFRS, when the property is held for rental income or capital appreciation the property is separated from PP&E as Investment Property.

US GAAP vs IFRS: Measurement of Accounting Elements

Fast forward to 2022, implementation has settled but standard setting has not – for example, the FASB amended its guidance on licenses and on revenue contracts in business combinations. Here we summarize what we see as the current main differences between IFRS 15 and Topic 606. There are some key differences between how corporate finances are governed in the US and abroad. Understanding GAAP and IFRS guidelines can be an asset, no matter your profession or industry.

gaap vs ifrs

While both IFRS 15 and Topic 606 remain substantially converged, certain differences exist that can affect comparability. Here we summarize what we see as the top 10 differences in revenue accounting and disclosures under IFRS Standards and US GAAP. Top 10 differences between IFRS 15 and ASC Topic 606 for revenue recognition.

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In contrast, IFRS allows some assets to be evaluated up to their original price and adjusted for depreciation. Debts that the company expects to repay within the next 12 months are classified as current liabilities, while debts whose repayment period exceeds 12 months are classified as long-term liabilities. On the contrary, IFRS sets forth principles that companies should follow and interpret to the best of their judgment.

  • A report, thus, is required to inform you, your educators, family and everyone else invested in your life about your progress.
  • IFRS rules ban the use of last-in, first-out (LIFO) inventory accounting methods.
  • Once a good’s been exchanged and the transaction recognized and recorded, the accountant must then consider the specific rules of the industry in which the business operates.
  • A professional accounting body issues them, and that is why they are adopted in many countries of the world.
  • The IFRS is used in the European Union, South America, and some parts of Asia and Africa.
  • Both accounting standards recognize fixed assets when purchased, but their valuation can differ over time.

Under GAAP, companies are required to disclose information about their accounting choices and their expenses in footnotes. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.


On the Radar briefly summarizes emerging issues and trends related to the accounting and financial reporting topics addressed in our Roadmaps. A company’s cash flow statement What is best nonprofit accounting software is also prepared differently under GAAP and IFRS. For professionals in non-accounting roles, understanding what’s behind an organization’s numbers can be immensely valuable.

GAAP prescribes that interest paid and interest received should be classified as operating activities, while international standards are a bit more flexible. Under IFRS, a firm can choose its own policy for classifying interest based on what it considers to be appropriate. Interest paid can be placed in either How to Start a Bookkeeping Business the operating or financing section of the cash flow statement, and interest received in the operating or investing sections. Accounting standards are critical to ensuring a company’s financial information and statements are accurate and can be compared to the data reported by other organizations.

Continue your IFRS Accounting standards and US GAAP learning

There are hundreds of smaller differences within each of the major topics of accounting, which are constantly being adjusted as the two standards are updated. 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. In-depth analysis, examples and insights to give you an advantage in understanding the requirements and implications of financial reporting issues. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.

  • If splitting your payment into 2 transactions, a minimum payment of $350 is required for the first transaction.
  • It is used in the European Union (EU), South America and parts of Asia and Africa.
  • IFRS is principles-based and may require lengthy disclosures in order to properly explain financial statements.
  • The video below compares the treatment of fixed assets under IFRS and GAAP.