Running header: US GAAP versus IFRS 1
Before explaining the advantages and disadvantages of the U.S. GAAP and IFRS it’s
important to first understand what they are and what they do. U.S. GAAP is “the generally
accepted accounting principals practiced in the United States.” ("U.S. GAAP definition," 2016)
US GAAP started in the 1930s and is still recognized today. “International Financial Reporting
Standards (IFRS) is a single set of accounting standards, developed and maintained by the IASB
with the intention of those standards being capable of being applied on a globally consistent
basis—by developed, emerging and developing economies—thus providing investors and other
users of financial statements with the ability to compare the financial performance of publicly
listed companies on a like-for-like basis with their international peers. IFRS are now mandated
for use by more than 100 countries.” ("IFRS - What are IFRS?", 2016) “IFRS Foundation and
the International Accounting Standards Board were established in 2001.” (“IFRS- Who we are
and what we do”, 2016) There are some overlapping guidelines for both the U.S. GAAP and the
IFRS, but there are some guideline differences that exist.
Many “incidents represented important changes in practice or in the way in which
accounting principles or standards were set” (Zeff, p. 1) for the US GAAP. Some of the concepts
for U.S. GAAP were started by political lobbying. Zeff explained it best in his paper, “Evolution
of U.S. Generally Accepted Accounting Principles (GAAP)” when he said, “When a highly
prescriptive standard setter is coupled with a rigorous enforcement process used by a government
regulator to secure compliance with accounting standards, especially in a confrontational society
such as the United States, companies and even branches of government will lobby the standard
setter not to approve standards that interfere with their plans and strategies. This is what has
happened increasingly in the United States since the 1970s, and there is no sign that, on sensitive
and controversial issues, it will diminish in intensity or frequency.” (p. 32)
Running header: US GAAP versus IFRS 2
“IFRS is used throughout the world except in the United States where US GAAP is
followed.” ("What is IFRS? | AccountingCoach", 2016) A question that could arise for a
company is, if using IFRS, is more reported when it comes to earnings and cash flows or is it the
same as US GAAP. Atwood, Drake, J Myers, and L Myers stated in “Do earnings reported
under IFRS tell us more about future earnings and cash flows?” that positive earnings reported
under IFRS are no more or less persistent than earnings reported under U.S. GAAP but losses
reported under IFRS are less persistent than losses reported under U.S. GAAP. Moreover, we
find that earnings reported under IFRS are no more or less persistent and are no more or less
associated with future cash flows than earnings reported under non-U.S. DAS. However, we find
that earnings reported under U.S. GAAP are more closely associated with future cash flows than
earnings reported under IFRS. This is important if a key role of reported earnings is to help
investors form expectations about future cash flows.”
One of the major differences is U.S. GAAP is rule based and IFRS is principle based.
Rule based means that the U.S. GAAP is extremely specific and there are multiple reasons stated
for each rule. “U.S. GAAP comprises over 2,000 separate pronouncements, many of which are
several hundred pages long, issued in various forms and formats by numerous bodies.” (Gill,
2007) Whereas the “IFRS currently fills approximately 2,000 pages of accounting regulations.”
(Gill, 2007) Principle based represents and captures different economics better than the U.S.
GAAP. It’s not as specific as rule based but it is just as important.
The balance sheet also known as the Statement of Financial Position is another difference
between the two. A balance sheet is a financial statement that shows assets, liabilities, and
shareholder’s equity. IFRS uses the IAS 1 that is very specific on how things are reported. “IAS
1 specifies items that must be presented on the face of the statement of financial position, and
Running header: US GAAP versus IFRS 3
lists additional information that must be either on the face or in the notes. Unlike IFRS, U.S.
GAAP does not prescribe a standard format. However, SEC Regulation S-X, Rule 5-02 does
require specific line items to appear on the face of the balance sheet, which is similar to IFRS.”
(Thornton, 2013) Some examples are the IFRS doesn’t require subtotals on the balance sheet
where U.S. GAAP does require them for current assets and liabilities. Also IFRS has to report
noncurrent items first whereas U.S. GAAP reports current assets and current liabilities before
noncurrent ones.
Income statement is another difference between the two. IFRS doesn’t have a specific
format that it requires companies to stick to, however it does require specific items to be on there
such as revenue, finance costs, tax expense, and profit or loss for the period. IFRS requires a
minimum of certain information to be reported, whereas U. S. GAAP doesn’t have a minimum
requirement. U.S. GAAP uses net income or net loss and doesn’t require specific items to be
included but does have two different formats that could be used in their income statements. “A
single-step income statement format groups all revenues and gains together and all expenses and
losses together. A multiple-step income statement format includes a number of intermediate
subtotals before arriving at income from continuing operations.” ("McGraw-Hill Connect",
2016) When a company chooses whether it wants to use a single-step format or multiple-step
format, there’s a lot to weigh in. The single-step format is very simple and easy to see however
revenues and expenses aren’t separated. The multiple-step format is easier to use for analyzing as
operating and non operating are separated. Depending on what the company wants to do will
determine which income statement they choose.
When it comes to creditors and investors, the first thing they will want to look at
is how much the company is making or losing, net profit or loss. How much is the business
Running header: US GAAP versus IFRS 4
making? No one will want to invest in the business or give the business money, if that business if
losing money. So as a business, you need to make sure that it’s easy to notice where the net profit
or loss is. The next thing is revenue. Revenue recognition is different when it comes to U.S.
GAAP and IFRS. IFRS is recognition when the risks and rewards of ownership have been
transferred. So ultimately it’s when the buyer has the merchandise and the company has the
money. U.S. GAAP allows for recognition when the company has followed the contract and
made the delivery, and the company is pretty sure it will get paid. IFRS is more cautious when it
comes to revenue recognition where U.S. GAAP is more relaxed. When it comes to a decision in
revenue recognition, as a business owner, IFRS would be the way to go. Revenue is how much
money a company makes. It would just make more sense to use IFRS. Once a business has the
money, it has made the profit. IFRS makes sure of that whereas U.S. GAAP can be wrong and
the buyer could back out.
Statement of cash flows changes with U.S. GAAP and IFRS. U.S. GAAP uses ASC 230
as the guidelines for statement of cash flows, where IFRS uses IAS 7. “Under U.S. GAAP, ASC
230-10-45-4 states that “the total amounts of cash and cash equivalents at the beginning and end
of the period shown in the statement of cash flows shall be the same amounts as similarly titled
line items or subtotals shown in the statements of financial position as of those dates. Under
IFRS, paragraph 45 of IAS 7 states that an entity is required to reconcile “the amounts [of cash
and cash equivalents] in its statement of cash flows with the equivalent items reported in the
statement of financial position.” ("Statement of cash flows: Key differences between U.S. GAAP
and IFRSs", 2016) U.S. GAAP is more specific than IFRS when it comes to certain transactions.
U.S. GAAP requires interest paid, interest received, and taxes paid to be classified under
operating. Dividends received can be operating or investing. And dividends paid are classified as
Running header: US GAAP versus IFRS 5
financing. When it comes to IFRS interest paid and dividends paid can be classified as operating
or financing. Interest received and dividends received can be classified as operating or investing.
And taxes paid are operating.
Intangible assets are defined by both U.S. GAAP and IFRS as “nonmonetary assets
without physical substance.” ("US GAAP versus IFRS: the basics", 2015) U.S. GAAP and IFRS
both require, amortization of intangibles over the lifespan of the asset. U.S. GAAP recognizes
costs incurred to maintain intangible assets as an expense when incurred. IFRS only recognizes
internally developed intangible assets if “it is probable that the expected future economic
benefits that are attributable to the asset will flow to the entity, the cost of the asset can be
measured reliably, and certain other criteria are met.” ("Goodwill and other intangible assets —
Key differences between U.S. GAAP and IFRSs", 2016)
When it comes to accounting for inventory, it is a huge difference between U.S. GAAP
and IFRS. U.S. GAAP uses ASC 330 as it’s relevant guide as IFRS uses IAS 2. U.S. GAAP can
use the last in, first out method, also referred to as LIFO or use the first in, first out or FIFO
method. With IFRS, LIFO is prohibited. Both measure inventory at the lower of cost or net
realizable value. LIFO allows companies to pay lower taxes and show a lower income. FIFO
allows for companies to bring out their inventory that was put in the warehouse first. This is
commonly used in grocery stores and restaurants.
It’s important to any business to have property and a building. Whether the business is
just starting out or expanding, there needs to be space and land. When it comes to the IFRS and a
lease of land and building, the land and the building are considered separately. Gain or loss on
the property is recognized immediately. U.S. GAAP allows for the land and building to be
Running header: US GAAP versus IFRS 6
accounted for in a single item. Gain or loss on the property is deferred and amortized over the
lease term.
When starting a business, it is a major decision to decide whether you want to use U.S.
GAAP or IFRS. U.S. GAAP allows for things to be done stateside. A huge advantage of IFRS is
that it’s international and it’s easily transferred from country to country, however not all
countries worldwide have gone to IFRS. There’s still a long way to go when it comes to the
financial world and how information is recorded.
Running header: US GAAP versus IFRS 7
References:
Atwood, T., Drake, M., Myers, J, & Myers, L. (2011). Do earnings reported under IFRS tell us
more about future earnings and cash flows?. Journal of Accounting and Public Policy, 30(2),
103-121. Abstract retrieved from
http://www.sciencedirect.com/science/article/pii/S0278425410000682
Gill, Lawrence M. IFRS: Coming to America. (2007). Journal of Accountancy. Retrieved 3 July
2016, from http://www.journalofaccountancy.com/issues/2007/jun/ifrscomingtoamerica.html
Goodwill and other intangible assets — Key differences between U.S. GAAP and IFRSs. (2016).
Iasplus.com. Retrieved 2 July 2016, from http://www.iasplus.com/en-us/standards/ifrs-
usgaap/goodwill
IFRS: What are IFRS?. (2016). Ifrs.org. Retrieved 24 June 2016, from http://www.ifrs.org/about-
us/pages/what-are-ifrs.aspx
IFRS: Who we are and what we do (2016). Ifrs.org Retrieved 24 June 2016, from
http://www.ifrs.org/The-organisation/Documents/2016/Who-We-Are-English-May-2016.pdf
McGraw-Hill Connect. (2016). p. 175. Retrieved 27 June 2016, from
http://connect.mheducation.com/connect/hmEBook.do?setTab=sectionTabs
Statement of cash flows: Key differences between U.S. GAAP and IFRSs. (2016). Iasplus.com.
Retrieved 3 July 2016, from http://www.iasplus.com/en-us/standards/ifrs-usgaap/cashflows
Thorton, Grant. Comparison between U.S. GAAP and International Financial Reporting
Standards. (2013). Retrieved 27 June 2016, from
http://www.gtturkey.com/UD_OBJS/PDF/IFRS/US_GAAP_IFRS_comparison_May2013.pdf
Running header: US GAAP versus IFRS 8
US GAAP definition | Dictionary | AccountingCoach. (2016). AccountingCoach.com. Retrieved
23 June 2016, from http://www.accountingcoach.com/terms/U/us-gaap
US GAAP versus IFRS: the basics. (2015). Retrieved 2 July 2016, from
http://file:///C:/Users/Kayla/Downloads/ifrsbasics_bb3119_22december2015.pdf
What is IFRS? | AccountingCoach. (2016). AccountingCoach.com. Retrieved 27 June 2016, from
http://www.accountingcoach.com/blog/what-is-ifrs
Zeff, Stephen A. Evolution of US Generally Accepted Accounting Principles (GAAP), 1, 32.
Retrieved 28 June 2016, from http://www.iasplus.com/en/binary/resource/0407zeffusgaap.pdf
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