The main differences between GAAP and IFRS, are mainly that IFRS has wider rules and less specific guidance which gives more room to interpretation of the financial statements. Because the IFRS incorporates the value of judgement by the accountant, it tends to be less detailed, more flexible and more informative.
The differences between GAAP and IFRS have been analysed in terms of their financial statement presentation, technicalities, and their importance for users of financial statements.
1. The statement of financial position
The changes in the layout of the statement of financial position as it is more concise and less detailed compared to the layout of the statement of the financial statement prepared under GAAP.
An example for this can be the layout of the financial statements. US GAAP requires its public companies to follow Regulation S-X where it specifically shows the detailed list of elements to be included in the financial statements.
However, IFRS also requires what to include in the financial statements, but it is far less detailed than the US GAAP.
Moreover, the guidance on offsetting of assets and liabilities can be indicated as another difference, thus, US GAAP gives limited guidance on offsetting of assets and liabilities whereas IFRS gives specific guidance.
And another difference is the exclusion of long term debt being refinanced under GAAP whereas under IFRS, the exclusion of long term debt from current liabilities.
And the similarities is the same components of financial statements under both IFRS and GAAP as both financial standards require to have balance sheet, income statement, cash flow and the accompanying notes to the financial statements.
2. Financial periods required
Firstly, US GAAP requires the last two years of balance sheet to be presented, and other statements are required to be for the last 3 years.
However, IFRS only requires the last period of balance sheet to be presented alongside with the recent one for comparison purposes.
Another significance of the IFRS and US GAAP difference is the nature of simplicity of IFRS. IFRS tends to be less detailed, thus, requires less information.
3. Accounting for revenue recognition
Another important factor which leads to differences between two reporting standards is the recognition of revenues as treated differently by both.
The main differences under two reporting standards are that, GAAP generally amortizes revenue over service period, but no up-front recognition however, IFRS has the possibility for up-front revenue recognition when the performance has occurred.
This is a major factor that leads to differing balances in the statement of financial position.
And a specific example may relate to a construction contract, where it says that it is recognized on the basis of increasing proportion of contract being done. And this example, made under IFRS, makes IFRS fairer than the GAAP.
4. Differences in cash flow statements
There are major differences in cash flow statements between GAAP and IFRS reporting standards. Under the old GAAP reporting standards the movement of cash needed to be reported in cash flow statement and there were no concept of “cash equivalents”. However, new IFRS reporting standards adopt the notion of “cash equivalents” and define them as cash in hand and deposits which are payable on demand.
Moreover, unlike GAAP reporting standards which required cash flows to be reported in nine sections, IFRS requires only operating, investing and financing sections for the cash flow to be reported.
Importantly, international differences in reporting standards may never be eliminated due to the following reasons:
- The differences continue to exist in some standards for which the convergence effeors have already been completed and not planned in near future
- The national standards tend to be more efficient and the local government may not wish to enforce IFRS
- The lack of strong international accountancy bodies that enforce the application of IFRS in certain countries
- IFRS not having the power of enforcing the application of its principles, as countries may not use and apply IFRS and instead may use their own national reporting standards
- Due to tax and cultural reasons as some countries tend to have significantly different ways of calculating tax allowance for non-current assets and the variances of law where some countries such as UK tend to use common law as a basis of standards
5. Differences in Inventory Management
Differences between IFRS and GAAP can also be seen in order of inventory. US GAAP uses LIFO method which assumes that goods purchased most recently are normally sold first than the remaining which were purchased earlier.
However, this is not allowed under IFRS. Moreover, companies using LIFO tend to pay less tax because LIFO shows lower gross profit, therefore, companies applying IFRS will have a sharp rise in the tax expenses, which can be seen as a disadvantage for the companies.