What are the differences between GAAP and IFRS?


Quick Answer

The International Financial Reporting Standards (IFRS) are more of a “principles-based” accounting practice than the rules-oriented U.S. Generally Accepted Accounting Principle (GAAP). By focusing on principles, IFRS is better at capturing the economics of transactions. That said, the rules-oriented GAAP is more easily applied and enforced when compared to the IFRS. However, with rules come exceptions, which add a layer of complexity to GAAP.

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Full Answer

The treatment of intangible assets illustrates why IFRS is regarded as more of a principles-based standard. Acquired intangible assets, such as advertising and research and development costs, under GAAP are viewed at fair value, while under IFRS, they are only recognized if the asset possesses a future economic benefit.

Inventory costs are also measured differently by the two standards. Under IFRS, the last-in, first-out accounting method for inventory costs is not permitted. Under GAAP, either last-in, first-out or first-in, first-out inventory estimates can be applied.

Under IFRS, inventory write-downs can be reversed in the future if specific criteria are satisfied. Under GAAP, reversals for inventory write-downs are strictly prohibited.

As of 2014, 120 nations and reporting jurisdictions permit or require IFRS for domestic-listed companies. GAAP is only required for US-based companies. As of 2014, for several years the Securities and Exchange Commission has been expressing support for adopting a core set of accounting standards that could act as a framework for financial reporting in international offerings. By adopting the IFRS model, a business can present its financial documents on the same basis as its foreign competitors or subsidiaries. This streamlines transactions and makes comparisons easier.

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