US GAAP and IFRS Differences
GAAP vs IFRS is the most arguable topic in accounting where the former is described as the financial reporting method having universal applicability whereas the latter are the set of principle-based guidelines composed for financial accounting. Since the last few years, IFRS has gained substantial significance, because of which over hundred countries have adopted IFRS as the standard for accounting. The issuing organizations of the two are consistently working on their convergence. Let’s check below for the IFRS and US GAAP similarities and differences.
Comparison Chart of Difference Between IFRS and Indian GAAP
Difference Between GAAP and IFRS Financial Statements
In general, GAAP mainly focuses on providing relevant information to a wide range of stakeholders. GAAP offers segregated objectives for business and non-business entities. Usually, broad focus is to offer relevant information to a wide range of stakeholders. IFRS offers a similar set of objectives for business and non-business entities.
The documents required in GAAP financial statements include Balance sheet, cash flow statement, income statement, statement of comprehensive income, changes in equity, footnotes. On the other hand, IFRS requires Balance sheet, cash flow statement, income statement, changes in equity, footnotes.
Difference Between US GAAP and IFRS
In GAAP, Standard structure and rules are introduced for typical financial accounting. Whereas IFRS represents a universal financial reporting method which enables international businesses to understand each other and work together.
US GAAP characterize Relevance, reliability, differentiability, and understandability. GAAP institutes a hierarchy of these features. Relevance and reliability are key qualities. Comparability is secondary. Understandability is regarded as a user-centric quality.
Relevance, reliability, differentiability, and understandability establish a hierarchy of IFRS features. The IASB framework states that its decision cannot b dependent upon particular circumstances of individual users.
In addition, The US GAAP framework describes an asset as a future economic advantage. The IFRS framework describes an asset as a resource from which future economic advantage will flow to the company.
Key Difference Between UK GAAP and IFRS
The significant difference between GAAP and IFRS are described under:
GAAP is a set of account based guidelines and procedures, implemented by the companies to prepare their financial statements. IFRS is a universal business language subsequent to the companies while reporting financial statements.
International Accounting Standard Board issues IFRS whereas Financial Accounting Standard Board issued GAAP
Use of LIFO is not permissible according to IFRS which is not in the case of GAAP.
Development Cost is regarded as an expense in GAAP, whereas IFRS, the cost is capitalized if the specified conditions are met.
IFRS is dependent on principles, whereas GAAP is based on rules.
Similarities Between GAAP and IFRS
Both are guiding principles that allow for the preparation and presentation of a statement of accounts. An authoritative professional accounting body issues them, and this is the reason they are adopted in different countries across the world. Both of the accounting methods provide relevance, reliance, comparability, understandability, transparency, of the financial statement.
FAQs on Difference Between GAAP and IFRS
1. What are the full forms of GAAP and IFRS?
The full forms are:
- GAAP stands for Generally Accepted Accounting Principles.
- IFRS stands for International Financial Reporting Standards.
2. What is the main difference between the GAAP and IFRS frameworks?
The fundamental difference lies in their approach. GAAP is a rules-based system, primarily used in the United States. It provides specific and detailed rules for how to account for transactions, leaving little room for interpretation. In contrast, IFRS is a principles-based system, used in over 140 countries. It offers broader principles and requires accountants to use their professional judgement to apply them, focusing on the economic substance of a transaction rather than strict rules.
3. Could you explain the difference between GAAP and IFRS with an example?
A classic example is the valuation of fixed assets like property and equipment.
- Under GAAP, assets are typically recorded at their historical cost and then depreciated over time. Their value cannot be increased even if the market value goes up.
- Under IFRS, companies have a choice. They can use the cost model (like GAAP) or a revaluation model, which allows them to report assets at their current fair market value. This means the value of an asset on the balance sheet can increase or decrease under IFRS.
4. Which accounting standard is used in India, GAAP or IFRS?
India does not directly use either US GAAP or IFRS. Instead, India has its own set of standards called Indian Accounting Standards (Ind AS). These standards are issued by the Institute of Chartered Accountants of India (ICAI) and are largely converged with IFRS, meaning they are based on and closely aligned with the global IFRS framework.
5. How do Indian Accounting Standards (Ind AS) relate to IFRS?
Ind AS are considered to be IFRS-converged standards. This means they have adopted the core principles and requirements of IFRS. However, they are not identical. The Indian government has made certain modifications, known as 'carve-outs' and 'carve-ins', to the IFRS framework to better suit the specific legal, economic, and business environment of India. Therefore, while Ind AS is very similar to IFRS, there are specific differences.
6. Why is GAAP known as a "rules-based" system while IFRS is "principles-based"?
This distinction refers to their core philosophy. A 'rules-based' system like GAAP attempts to provide specific, detailed guidance for every possible accounting scenario. It acts like a comprehensive instruction manual. A 'principles-based' system like IFRS, on the other hand, provides a conceptual framework and a set of broad principles. It empowers accountants to interpret these principles and make judgements based on the transaction's substance, which offers more flexibility but also demands greater professional expertise.
7. Apart from their core philosophy, what are some key similarities between GAAP and IFRS?
Despite their differences, GAAP and IFRS share common goals and foundations. Both frameworks aim to ensure that financial statements are transparent, reliable, consistent, and comparable. They both require the presentation of a complete set of financial statements, including the Balance Sheet, Income Statement, and Cash Flow Statement. Furthermore, both systems are built upon the accrual basis of accounting and share fundamental concepts like the going concern assumption.
8. What is the primary advantage for global businesses adopting IFRS?
The primary advantage of adopting IFRS is enhanced comparability and transparency on a global scale. When companies in different countries use the same set of accounting standards, it becomes much easier for investors, lenders, and other stakeholders to compare their financial performance and position. This uniformity simplifies cross-border investments, reduces the cost of capital for businesses, and makes international financial markets more efficient.
