IFRS vs US GAAP: Key Differences for Accountants
For publicly-traded companies in the US, these rules are created and overseen by the Financial Accounting Standards Board (FASB) and referred to as US Generally Accepted Accounting Principles (US GAAP). However, there is no plain distinction between liabilities in IFRS, so short-term and long-term liabilities are grouped together. On the contrary, IFRS sets forth principles that companies should follow and interpret to the best of their judgment. Companies enjoy some leeway to make different interpretations of the same situation. Discover how EY insights and services are helping to reframe the future of your industry.
Research and Development (R&D) Costs
Emerging technologies such as XBRL, AI-driven audit systems, and cloud-based ERP platforms may play a role in bridging interpretive gaps, even if full convergence remains out of reach. The information contained herein is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. KPMG has market-leading alliances with many of the world’s leading software and services vendors. Compare features, benefits, and scalability to find the right fit for your business. Under US GAAP, both Last-In-First-Out (LIFO) and First-In-First-Out (FIFO) cost methods are allowed.
However, IFRS provides greater discretion with respect to which section of the Statement of Cash Flows these items can be reported in. US GAAP lists assets in decreasing order of liquidity (i.e. current assets before non-current assets), whereas IFRS reports assets in increasing order of liquidity (i.e. non-current assets before current assets). We have compiled a single cheat sheet to outline the key differences between US GAAP and IFRS.
Honda disclosed a development costs asset as of its March 31, 2021, year-end of ¥1,108,616 million. To convert the company’s reporting to a GAAP basis, the asset would need to be removed, with the offset (after taxes) reducing retained earnings. The resulting expense on a GAAP basis, ¥863,999 million, is 7.1% higher than the IFRS-basis expense. The result of measurement differences, particularly in fair value accounting and lease recognition, is what affects financial statements and ratios. Such differences are relevant for global companies to ensure proper financial reporting and to be up to date with international standards.
- Under IFRS, the LIFO (Last in First out) method of calculating inventory is not allowed.
- It is crucial to involve various stakeholders, including finance teams, IT departments, and external auditors, to ensure a holistic approach.
- Contrary to GAAP, all eight companies stated they capitalize transaction costs for the purchase of financial assets not reported at fair value through NI.
Largest Foreign Private Issuers
Understanding these frameworks is essential due to their significant influence on how companies report their financial performance. This understanding becomes even more critical as businesses increasingly operate on an international scale. Explore the essential differences between US GAAP and IFRS and their implications for global financial reporting and multinational corporations.
Fixed assets.
Under IFRS, the LIFO (Last in First out) method of calculating inventory is not allowed. Under the GAAP, either the LIFO or FIFO (First in First out) method can be used to estimate inventory. The IFRS is a set of standards developed by the International Accounting Standards Board (IASB). The IFRS governs how companies around the world prepare their financial statements. Unlike the GAAP, the IFRS does not dictate exactly how the financial statements should be prepared but only provides guidelines that harmonize the standards and make the accounting process uniform across the world. EY’s illustrative IFRS and US GAAP statements sample provides valuable insights into the differences between these us gaap versus ifrs two widely used accounting standards.
On the other hand, the consistent and intuitive principles of IFRS are more logically sound and may possibly better represent the economics of business transactions. In the United States, if a company distributes its financial statements outside of the company, it must follow generally accepted accounting principles, or GAAP. If a corporation’s stock is publicly traded, financial statements must also adhere to rules established by the U.S. The treatment of developing intangible assets through research and development is also different between IFRS vs US GAAP standards. On the other hand, US GAAP generally requires immediate expensing of both research and development expenditures, although some exceptions exist.
Business Accounting Specialist Program (BASP)
In the realm of asset valuation, US GAAP generally favors historical cost, providing a stable and verifiable basis for asset values. IFRS, conversely, allows for revaluation of certain assets to fair value, reflecting current market conditions. This can result in more volatile financial statements but may offer a more accurate depiction of a company’s financial health. IFRS uses a single, principles-based model requiring revenue to be recognized when control of goods or services transfers to customers. At the same time, GAAP follows detailed, industry-specific guidelines, resulting in potentially different timing and revenue recognition methods.
The differences in the treatment of R&D costs for both US GAAP and IFRS can be quite material with respect to financial statements. The reality is that R&D spending, especially in technology, pharmaceutical, and manufacturing sectors, is huge. US GAAP recognises expenditure immediately, while on the other hand, capitalisation under IFRS influences important finance metrics like net income and return on assets. Understanding the key differences between these two accounting standards is essential for businesses operating in a global marketplace.
Leases (ASC 842 and IFRS
- However, some investors may prefer the detailed, rules-based approach of US GAAP, which can offer a sense of precision and reliability.
- Sale-leaseback accounting is not automatically precluded if the leaseback is classified as a finance lease by the buyer-lessor (or would be by the seller-lessee if lease classification were applicable).
- In contrast, IFRS considers each interim report as a standalone period, and while an MD&A is allowed, it is not required.
- In 2015, US GAAP effectively matched IFRS’s treatment of netting these costs against the amount of outstanding debt, similar to debt discounts.
- This shift towards a unified reporting framework has also led to greater transparency.
Additionally, the need for robust IT systems to handle the new reporting requirements cannot be overstated. Financial reporting tends to provide and facilitate comparison between companies allowing both cross-sectional and time series analysis. If you have specific questions or require further guidance on navigating IFRS, US GAAP, or any other financial reporting matters, please feel free to reach out to our team.
Principles vs. Rules-Based Approach:
Companies can more readily identify synergies and potential risks, leading to more informed decision-making. The impact of IFRS on financial reporting extends to the realm of corporate governance as well. The increased transparency and comparability fostered by IFRS can lead to more effective oversight by boards of directors and audit committees.
Seven of the eight companies stated they capitalize qualifying development costs, a treatment IFRS requires. Honda Motor reported a development cost intangible asset at fiscal year-end 2021 of ¥1,108,616 million (11.8% of equity). With the exception of certain software development costs, GAAP calls for spending on development activities to be expensed as incurred. In addition, six of the companies used an elective treatment in IFRS that reduces the initial measurement of goodwill. IFRS permits companies to elect, acquisition-by-acquisition, to initially measure a noncontrolling interest in an acquiree at its share of the fair value of the acquiree’s identifiable equity. Effectively, the excess of fair value over the fair value of identifiable equity that gives the initial value of goodwill is considered only to the extent of the acquirer’s controlling interest.