IFRS versus GAAP

There are two sets of accounting standards that are accepted for international use: US standards known as Generally Accepted Accounting Principles (GAAP) and international standards known as International Financial Reporting Standards (IFRS). The first is being developed by the Financial Accounting Standards Board (FASB), whose authority derives from the United States Securities and Exchange Commission (SEC). The second is being developed by the International Accounting Standard Boards (IASB), an independent accounting standards-setting body based in London. Although GAAP and IFRS share some similarities in presenting their financial statements, they do not agree on every point. There are differences between these two sets of rules in the reporting and classification of elements of income statements and balance sheets.

Unlike the more detailed rules-based GAAP standard, the principles-based IFRS standard tends to be simpler in its accounting and disclosure requirements. The income statement is a required statement under both IFRS and GAAP and is referred to as the “statement of comprehensive income”. The statement of comprehensive income under IFRS is similar to that under GAAP; Still, there are few differences when comparing these two income statements.

The presentation of the GAAP income statement follows either a single-level or multi-level format. However, IFRS does not mention a one-step or multi-step approach. Under IFRS, entities classify expenses either by type (such as cost of materials, direct labor, advertising, depreciation, and employee benefits) or by function (such as cost of goods sold, selling expenses, and administrative expenses). Although GAAP does not have this requirement, the SEC requires a functional presentation. While GAAP defines operating income, IFRS does not recognize this key measure. In addition, extraordinary items are prohibited under IFRS; whereas, under GAAP, companies are required to report extraordinary items if they are unusual in nature and occur infrequently. The portion of the gain or loss attributable to the non-controlling interest (or minority interest) is presented separately in the IFRS statement of comprehensive income. Also, while IFRS identifies certain minimum items that should be presented in the statement of comprehensive income, GAAP has no minimum information requirements. However, the SEC has stricter filing requirements.

The presentation of the balance sheet is required by both GAAP and IFRS. The most visible difference is how IFRS refers to this statement as “Financial Condition” rather than Balance Sheet. Accounting is based on IFRS, which means that items of the same type are combined to form significant subtotals. In addition, the IASB notes that the parts and subsections of the financial statements are more informative than the whole; as a result, the IASB does not encourage reporting of summary accounts (e.g. total assets, total liabilities, etc.). Unlike GAAP, under IFRS current assets are usually listed in reverse order of liquidity. For example, under IFRS, cash is listed last. In addition, most companies under IFRS present current and non-current liabilities as separate classifications on their balance sheets, except in industries where the presentation of liquidity provides more useful information. It is important to note some key differences in reporting items on the balance sheet between GAAP and IFRS.

In current assets, inventories are valued differently according to IFRS. The use of (LIFO) last-in-first-out is prohibited under IFRS. In addition, unlike under GAAP, when inventories are depreciated at the lower of cost or market, they may be reversed in a subsequent period up to the amount of the previous depreciation under IFRS. In addition, IFRS permits the revaluation of property, plant and equipment and intangible assets and reports this as other comprehensive income.

IFRS uses different terminology in the equity section of its balance sheet. For example, share capital is the par value of the issued share. It includes common stock (referred to as common stock) and preferred stock (referred to as preferred stock). The equity bonus under IFRS is the excess of paid-up amounts over face value.

A major problem caused by the disparity associated with how GAAP and IFRS financial statements are presented is the lack of consistency. This issue creates difficulties when comparing financial statements between GAAP and IFRS. As a result, it makes sense for US companies with foreign subsidiaries to switch to IFRS to facilitate comparisons for stakeholders and to gain access to global capital markets. However, small US firms may not benefit from moving to IFRS; The switch will result in additional costs that may outweigh the benefits.