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Understanding the Differences Between IFRS and GAAP

Every country has its own rules for how businesses report their finances. In the U.S., companies follow the Generally Accepted Accounting Principles (GAAP) when they put together financial statements. Outside the U.S., many countries use the International Financial Reporting Standards (IFRS), which aim to create a common global language for accounting.

Without these accounting standards, companies could easily manipulate their financial results to appear more successful than they are. That’s where GAAP and IFRS come into play. These two sets of guidelines—one American, and one international—help ensure companies report their finances accurately. This consistency gives Investors confidence that they’re getting a true picture of a company’s financial health.

Difference Between International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) 

Inventory Valuation Methods

  • GAAP: Companies in the U.S. can choose from three methods to value their inventory: First In, First Out (FIFO), Last In, First Out (LIFO), and Weighted Average. Under FIFO, GAAP uses net asset value, which is calculated as total assets minus liabilities.

  • IFRS: Internationally, companies using IFRS can only use FIFO and Weighted Average methods. LIFO is not allowed because it can be manipulated to lower earnings and reduce tax liability. Under FIFO, IFRS values inventory based on net manageable value, the expected sales price minus any costs, fees, or taxes related to the sale.

Cash Flow Statement Classification

  • GAAP: In the U.S., interest paid and received, along with dividends received, are all listed under the operating section of the cash flow statement. Dividends paid are listed in the financing section of the cash flow statement.

  • IFRS: IFRS offers more flexibility, allowing all interest and dividends to be listed under the operating or financing section.

Balance Sheet Presentation

  • GAAP: When preparing a balance sheet under Generally Accepted Accounting Principles (GAAP), assets are listed in order of liquidity, starting with the most liquid. This means you’ll see current assets first, then non-current assets, current liabilities, non-current liabilities, and finally, owners’ equity.

  •  IFRS: International Financial Reporting Standards (IFRS), suggests the opposite order, starting with the least liquid assets. So, non-current assets come first, followed by current assets, owners’ equity, non-current liabilities, and current liabilities.

Asset Revaluation

  • GAAP: Under GAAP, only marketable securities (like stocks and investments) can be revalued at fair market value.

  • IFRS: IFRS is more flexible, allowing companies to revalue a broader range of assets, including property, plant, equipment (PPE), inventories, intangible assets, and investments.

 Inventory Write-Down Reversals

  • GAAP: If an asset loses value (like inventory that becomes obsolete), Generally Accepted Accounting Principles (GAAP) requires businesses to write down its value, and they can’t reverse it even if the asset regains value later.

  • IFRS: IFRS allows for more flexibility. If the factors causing the asset to lose value no longer apply, companies can write the value back up, although not beyond the original price.

Development Costs

  • GAAP: In the U.S., development costs for intangible assets, like patents or intellectual property, are treated as expenses. This means they’re recorded as costs in the period they’re incurred.

  • IFRS: Under International Financial Reporting Standards (IFRS), companies can capitalize and amortize development costs over multiple periods. This means these costs are spread out over time, which can impact how they appear on financial statements.

Conclusion

Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) serve the same purpose: to provide a clear and consistent framework for financial reporting. However, the differences between these two sets of standards can lead to varying financial outcomes, depending on which one a company follows. Meru Accounting is a well-known accounting agency that provides financial reporting services to businesses around the globe.

Meru Accounting offers outsourced services for International financial reporting systems (IFRS) and Generally Accepted Accounting Principles (GAAP). Our expert team is well-versed in these financial reporting standards and can ensure everything is handled correctly.