GAAP Vs. IFRS: The Differences

The major issue between International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) has been a topic of interest in the accounting world this past decade.  Today, most countries in the world use International Financial Reporting Standards guidelines.  The United States, however, still uses Generally Accepted Accounting Principles.  The issue has been a main focal point because the Securities Exchange Commission (SEC) will decide by the year 2011 on whether or not U.S. companies will be required by law to use IFRS starting in 2014.  The United States accounting structure will go through tremendous changes if this happens, but in the long-run the idea is to narrow down the accounting procedures globally.

The main difference between GAAP and IFRS is that GAAP is rule-based, while IFRS tends to be more principle-based.  This means that IFRS has room for understanding and could be accepted in the United States.  The purpose of switching to IFRS is to compare and contrast accounting standards globally.  The main goal is to lower costs for large corporations and to allow investors to make practical comparisons between companies across the globe.  IFRS does not only affect large companies, but also small ones.  If and when IFRS goes into effect, companies will have the capability to compare and contrast the performance of other companies in the world.  Therefore, IFRS is seen as more than just a way to provide global accounting standards.  IFRS will also give opportunity for companies to look into the value and the strengths of management through decisions made when reporting financial results.

Other differences play in affect between IFRS and GAAP.  When it comes to inventory, GAAP allows the last in first out method (LIFO), however, it is not acknowledged in IFRS.  If there is a change from GAAP to IFRS, this would force a company to implement either the weighted average cost method, or the first in first out (FIFO) method – both of which are already accepted in GAAP.

Another difference happens in the dimension of depreciation with property, plant, and equipment.  Under GAAP, property, plant, and equipment is usually measured at a whole, but after it is acknowledged it cannot be revalued.  IFRS requires that separate or major components of property, plant, and equipment be depreciated instead of entirely.

When it pertains to leases under GAAP, these four rules come in to affect - the ownership of the lease, a bargain purchase option, the lease term, and the current value of minimum lease payments.  On the other hand, IFRS assesses these rules that GAAP uses, but it does not place a certain "threshold" on the amount.  IFRS spotlights in particular the core of the purchase and all of the risks/rewards of ownership.  This is a great example of how IFRS uses judgment instead of strict rule-based criteria.

There are quite a few differences between GAAP and IFRS when they relate to income taxes.  Under GAAP, the tax rate is the authorized tax rate in place when the timing difference is likely to reverse.  IFRS, however, uses the enacted tax rate.  The categorization of the postponed tax asset or liability is either short-term or long-term under GAAP while the IFRS deferred tax assets or liabilities are recorded as long-term only.

Under GAAP, assets are generally carried at historical cost, while IFRS uses historical cost as the main source of accounting.  IFRS also lets companies to revalue assets which may show significant differences in carrying value.

It should also be noted that certain management's compensation is required to be disclosed under IFRS, whereas in GAAP it is not.

In conclusion, the details of all the differences and changes that would take place if IFRS did surpass GAAP are far too many to cover.  Generally, all the differences that were mentioned in this article are important to discuss about IFRS and GAAP.  The main argument that IFRS should take over GAAP is that things would be much less confusing in the accounting world.  Although many disagree on this notion, it will be up to the Security Exchange Commission to decide by next year.  According to many accountants, experts, and businesses, United States GAAP is by far the most structured accounting rule of all the existing outlines in the world.  With IFRS having more room for understanding, it takes away from the rule-based obstacles that exist within GAAP principles.  On the optimistic side, if IFRS does surpass GAAP, hopefully there will be more of a coming together and less confusion in the accounting world.

1.  Johnson, Sarah, "Goodbye GAAP",  The CFO Journal, April 2008

2.  Pacter, Paul, "Convergence of IFRS and U.S. GAAP", The CPA Journal, March 2003

3.  Ernst & Young, March 2010, "US GAAP vs. IFRS: The Basics"

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