GAAP vs. IFRS

Illumeo Customer Success's Profile

GAAP stands for Generally Accepted Accounting Principles and is the accounting standard used by the United States.  The standard-setting board behind GAAP is the Financial Accounting Standards Board (FASB). IFRS stands for International Financial Reporting Standards and it is the accounting standard system used over 120 countries all over the world.  The standards-setting board behind IFRS is the International Accounting Standards Board (IASB), which was created in 2001 and is an independent organization. While the United States has no current plans to require domestic companies to use IFRS, the continued global adoption of IFRS is relevant to companies with international connections.  Being bilingual in the financial standards is necessary and important.  

Principles-Based v Rules-Based Accounting

IFRS accounting is considered principles-based accounting, meaning there is potential for different interpretations of similar transactions and these interpretations could lead to extensive disclosures in the financial statements.  The IASB has the ability to clarify unclear areas under this principles-based system that creates fewer exceptions to the principles. There are fewer set rules in IFRS accounting and there is limited guidance based on industry. Principle-based statements are broad and can be practical in application to many different situations. In comparison, GAAP is considered rules-based accounting.  GAAP financial statements are based on 10 guiding principles (rules) for accounting. Within each standard, there are rules to follow to determine the proper accounting method. Rules-based accounting limits the ambiguity that can guide decision making related to financial statements.

A great example of the difference between principle-based accounting and rules-based accounting is the accounting for leases ASC 842 v .  ASC 842 details the accounting for leases using GAAP. ASC 842 is a rules-based accounting standard in that the standard is detailed and structured with many rules and steps that could apply many lease situations, starting with the determination of the type of lease. Whereas IFRS 16 is a more general statement that still provides accounting guidance but leaves more room for interpretation.  

Financial Statements - Similarities and Differences

GAAP and IFRS require similar types of financial statements, but with varying details in each statement depending upon the standards being followed.  

Required Statements:

GAAP and IFRS requires the following statements:

 

  • Balance Sheet

  • Income Statement

  • Statement of Cash Flows

Key Differences:

GAAP and IFRS report these financial statement items differently:

  • Separation of current and noncurrent assets and liabilities is recommended for GAAP but required for IFRS.

  • Listing of assets, liabilities and equity by decreasing liquidity is required by GAAP but not by IFRS

  • Deferred taxes are included with assets and liabilities in GAAP statements but are shown as separate line items in IFRS statements. 

  • GAAP requires the use of single-step or multi-step formats for the Income Statement but IFRS does not require a specific format for the Income Statement.

  • An extraordinary line item is allowable on GAAP income statements but is prohibited on IFRS statements.

  • The Statement of Recognized Income and Expense (SoRIE) is unique to IFRS.  The information contained in the statement is similar to information on the GAAP Statement of Changes in Stockholders’ Equity.

  • The Statement of Changes in Stockholders’ Equity can be presented as a note to the financial statements in GAAP statements.

GAAP v IFRS

While this was a brief recap of the differences between GAAP and IFRS, there are many courses available (including here at Illumeo) to help you better understand the difference. You can see the courses we offer on GAAP by clicking here, and the courses we offer on IFRS here