What’s the Difference Between GAAP and IFRS Accounting Conventions?

Also Read

If you are an accountant, a business owner, or a student of finance, you may have heard of GAAP and IFRS. These are two sets of accounting standards that are used to prepare and present financial statements. But what are they, and how do they differ?

GAAP stands for Generally Accepted Accounting Principles. It is a set of rules and guidelines that are followed by companies and organizations in the United States and some other countries. GAAP is issued by the Financial Accounting Standards Board (FASB), a private, non-profit organization that sets the accounting standards for public and private companies and non-profit organizations in the US.

IFRS stands for International Financial Reporting Standards. It is a set of accounting standards that are used by more than 140 countries around the world. IFRS is issued by the International Accounting Standards Board (IASB), an independent, non-profit organization that develops and approves the accounting standards for international use.

The main difference between GAAP and IFRS is that GAAP is more rules-based, while IFRS is more principles-based. This means that GAAP provides more specific and detailed guidance on how to account for different transactions and events, while IFRS allows more room for professional judgment and interpretation. For example, GAAP has more than 200 pages of guidance on how to account for leases, while IFRS has only 16 pages.

Another difference between GAAP and IFRS is that GAAP allows some alternative methods of accounting for certain items, while IFRS requires a single method. For example, GAAP allows companies to use either the first-in, first-out (FIFO) or the last-in, first-out (LIFO) method to value their inventory, while IFRS only allows FIFO. This can result in different reported amounts of inventory and cost of goods sold.

A third difference between GAAP and IFRS is that GAAP tends to be more conservative than IFRS in terms of recognizing revenue and income. For example, GAAP requires companies to recognize revenue only when it is realized or realizable and earned, while IFRS allows companies to recognize revenue when it is probable that future economic benefits will flow to the entity. This can lead to earlier recognition of revenue under IFRS than under GAAP.

These are some of the major differences between GAAP and IFRS accounting conventions. However, there are many more differences in various areas of accounting, such as financial instruments, intangible assets, impairment, consolidation, and disclosure. Therefore, it is important for accountants, business owners, and finance students to be aware of these differences and their implications for financial reporting and analysis.