The International Financial Reporting Standards (IFRS), and US Generally Accepted Accounting Principles (GAAP), are the two most widely used accounting standards in the world.
IFRS standards are set forth by International Accounting Standards Board (IASB), and GAAP principles are set forth by Financial Accounting Standards Board (FASB).
GAAP is more widely used by US companies, while IFRS is more common with companies listed outside the US.
U.S. GAAP is scheduled to start converging with IFRS by the end of 2014.
Let’s take a look at the key differences between the two:
In a company the inventory can be tracked using one of the two methods, namely, Last In First Out (LIFO) and First In First Out (FIFO). The US GAAP allows the use of any of the two methods, while in IFRS, LIFO accounting is not allowed.
Interest Receipts and Payments
The various cash flows of an operation can be identified as operating, financing or investing activities. In IFRS, the interest payments and receipts can be identified as any of these three activities, while in US GAAP, interest receipts can be identified only as operating activity.
Consolidation refers to inclusion of the financial statements of a subsidiary into the parent company’s financial statements.
In US GAAP, to be able to consolidate, the focus is on controlling financial interest. As long as the parent company has control over the financial interest of the subsidiary, the consolidation can be carried out. In case of IFRS, the focus is on having the ability to control both the financial interest and the operating policies. The control is assumed to exist of the parent company has over 50% of votes.
Property held for Investments
In general, US GAAP recognizes only two types of accounts for properties, i.e., held for sale, or held for use. The US GAAP does not have a separate account for investment properties; so all investment properties are recognized as either held for use, or as held for sale. However, in IFRS, investment property is separately defined in IAS 40 as an asset held to earn rent or for capital appreciation (or both) and may include property held by lessees under a finance/operating lease. Therefore, accountants can account for investment property based on a historical cost basis or on a fair value basis.
Under US GAAP, most of the lease transactions only affect the income statement, and are not recorded as balance sheet items. However, in IFRS, most leases are recognized as financing leases, so, the company must recognize the asset as well as the future lease liability.
Both IFRS and GAAP do not recognize revenue until it is earned, however, there are certain differences. For example, let’s take the case of sale of goods. In case of US GAAP, revenue is recognized once the delivery has occurred, there is persuasive
evidence of the sale, the fee is fixed or determinable, and collectibility is reasonably assured. In IFRS, the revenue is recognized only when the ownership has been transferred, and the revenue can be measured reliably.
With respect to receivables, IFRS considers it to be a financing agreement. All future receivables should be discounted using the appropriate interest rates in order to determine the value of revenue.
The US GAAP allows construction contract revenues to be recognized using the percentage-completed or the completed-contract method. The IFRS prohibits the use of completed contract method.
The two accounting standards also have differences in the way the financial reports are presented.
Note that this article provides only the key differences. This is not an exhaustive list of differences in the two standards.