U.S. GAAP and IFRS
The goal of financial reporting is to standardize financial information. It is a syntax. Something that companies must follow for consistency. The rules are not static. Accounting rules are constantly evolving in interpretation and new concerns are always being proposed.
U.S. GAAP
US GAAP (Generally Accepted Accounting Principles) is the set of accounting standards, principles, and procedures that public and private companies in the United States follow when preparing financial statements. These principles ensure consistency, comparability, and transparency in financial reporting, allowing stakeholders to make informed decisions based on the financial information provided.
The FASB is a private, independent body, separate from the SEC, that is responsible for developing what is known as the Generally Accepted Accounting Principles (GAAP). FASB is influenced by accounting firms, corporations, investors, government, IRS, academia, etc. The Accounting Standards Codification (ASC) is the single source of truth of all authoritative U.S. GAAP in one spot. This was not always the case as the ASC was only established in 2009. By consolidating and updating accounting standards into one codified system, the ASC enhances the clarity, consistency, and usability of GAAP, thereby facilitating accurate and reliable financial reporting practices across industries.
IFRS
International Financial Reporting Standards (IFRS) are a set of accounting standards developed and maintained by the International Accounting Standards Board (IASB), aimed at achieving global comparability and transparency in financial reporting. IFRS provides a common framework for preparing financial statements of public companies worldwide, facilitating consistency and understanding among users of financial information across different countries and jurisdictions.
Unlike U.S. GAAP, IFRS is principles-based, emphasizing the substance of transactions over their legal form and allowing more flexibility in interpretation.
IFRS is used in over 140 countries including most of the EU, Canada, and Australia.
U.S. GAAP vs IFRS
U.S. GAAP is fairly similar to IFRS, there was almost complete convergence to IFRS. But in 2014, the SEC backed away from complete convergence. However, at the core global financial reporting is more standardized than it has been in the past.
Again, the increased quality of standards and consistency means more efficient capital markets. Money flows more freely when there is more transparency around otherwise private and non-standardized information.
|
Aspect |
U.S. GAAP |
IFRS |
|
Standard-Setting Bodies |
Financial Accounting Standards Board (FASB) |
International Accounting Standards Board (IASB) |
|
Principles vs. Rules |
Rule-based with specific guidance |
Principles-based with flexibility in interpretation |
|
Inventory Costing |
Allows LIFO method |
Prohibits LIFO; uses FIFO or weighted average |
|
Development Costs |
Generally expensed as incurred |
Can be capitalized under specific criteria |
|
Intangible Assets |
Limited recognition of internally generated intangibles |
Broader criteria for recognizing intangible assets |
|
Revenue Recognition |
Prescriptive guidelines across industries |
Principles-based approach emphasizing substance |
|
Financial Statement Presentation |
Two-statement approach (income statement and statement of comprehensive income) |
Single-statement approach (statement of profit or loss) or two statements (income statement and statement of comprehensive income) |
|
Presentation of Expenses by Function/Nature |
Expenses typically presented by function (e.g., cost of sales, administrative expenses) |
Flexibility to present expenses by function or nature; no specific requirement for classification by function |
|
Unusual or Exceptional Items |
Uses terminology like “unusual” or “exceptional” for significant items; presented separately or disclosed in the notes |
Does not categorize items as “unusual” or “exceptional”; significant events or transactions are separately presented or disclosed as needed |
|
Non-GAAP Financial Measures |
Prohibits presentation of non-GAAP financial measures in financial statements by SEC registrants |
Does not define or regulate non-GAAP financial measures; companies may use NGFMs with proper disclosure |
|
Standard-Setting Projects |
FASB has ongoing projects related to financial statement presentation |
IASB is conducting projects on primary financial statements, including subtotals in income statement, NGFMs, and treatment of unusual or infrequent items; potential changes in presentation standards expected |