What are the 5 significant differences and similarities between IFRS and US GAAP?

With respect to US GAAP and IFRS similarities and differences, US GAAP and IFRS refer to two accounting standards and concepts followed by countries around the world. More than 110 nations have adopted the International Financial Reporting Standards (IFRS), which fosters standardisation in generating financial accounts.

The difference between US GAAP and IFRS is that the governing financial reporting and accounting differ from nation to nation. In the United States, it is the job of the Financial Accounting Standards Board (FASB) to establish and standardise financial reporting practices within the framework of generally accepted accounting principles (GAAP). The International Financial Reporting Standards (IFRS) guide how various financial transactions and events should be recorded in financial statements across borders. The International Financial Reporting Standards (IFRS) are published by the International Accounting Standards Board (IASB). In addition, this blog post highlights the top five key differences between IFRS and US GAAP.

Alternatively, the consistent and intuitive concepts of IFRS are more conceptually sound and may depict the economics of commercial transactions more accurately. 

To be very specific, the key US GAAP and IFRS differences are:

1.      Management of stock

The stock cost accounting approach is one of the primary distinctions between these two accounting standards. IFRS prohibits the LIFO (Last In, First Out) technique of inventory calculation. Under US GAAP, a consistent cost formula is not specifically needed for inventories of identical nature. Under IFRS, the same cost formula must be used for all inventories with a comparable type or use. Following GAAP, Stock may be evaluated using the LIFO or FIFO (First in, First out) technique.

2.      Intangibles

Under IFRS and US GAAP, developing intangible assets through research and development is handled differently. According to IFRS, research costs are expensed as incurred. Depending on several circumstances, costs incurred during the development phase may be capitalised. In accordance with US GAAP, development costs associated with computer software produced for external use are capitalised once technological feasibility has been determined. On the other hand, US GAAP typically demands rapid expense recognition of research and development expenditures, with certain exceptions. The assets are listed first to facilitate their conversion to cash, which is the significant difference between the US GAAP to IFRS conversion.

3.      Rules vs. Principles

The main differences between IFRS and GAAP are how they evaluate accounting activities, i.e., whether they are based on established rules or principles that allow for some discretion. The GAAP prescribes stringent regulations and procedures for the accounting process, leaving minimal opportunity for interpretation. The safeguards are designed to prevent profit-maximising exceptions from being created by opportunistic entities.

 4.   Recognition of earnings

Regarding the Recognition of earnings, the significant US GAAP and IFRS differences are that IFRS is more general than GAAP regarding how revenue is recognised. The latter begins by establishing whether income has been realised or earned and specifies how revenue is recognised across various businesses.

5.      Allocation of liabilities

When generating financial accounts by GAAP accounting standards, liabilities are categorised as either current or non-current based on the time the company has to repay its debts. Current liabilities are debts that the corporation plans to repay within the next 12 months.

Some of the Similarities between IFRS and US GAAP:

There are several similarities between US GAAP and IFRS principles and some similarities. Both GAAP and IFRS have a framework for accounting and finance that is structurally similar. It includes the accounting objectives, elements, and characteristics.

Both standards utilise cash flow statements, income statements, and balance sheets. They also provide the same guidelines for cash and cash equivalent transactions. In addition, their financial statement preparation follows the same accrual-based methodology, and both can recognise revenue when it is realisable.

They use accrual accounting for their financial statements, which consist of balance sheets and income statements that determine a company’s assets and liabilities. Moreover, GAAP and IFRS believe financial statements should be transparent to investors.

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