Statement of cash flows: IFRS® Accounting Standards vs US GAAP

gaap vs ifrs

On the other hand, the flexibility to use either FIFO or LIFO under GAAP allows companies to choose the most convenient method when valuing inventory. A focus on principles may be more attractive to some as it captures the essence of a transaction more accurately. In practice, however, since much of the world uses the IFRS standard, a convergence to IFRS could have advantages for international corporations and investors alike.

The latter starts by determining whether revenue has been realized or earned, and it has specific rules on how revenue is recognized across multiple industries. The other distinction between IFRS and GAAP is how they assess the accounting processes – i.e., whether they are based on fixed rules or principles that allow some space for interpretations. Under GAAP, the accounting process is prescribed highly specific rules and procedures, offering little room for interpretation.

What are the Similarities Between US GAAP and IFRS?

In effect, this facilitates the standardization and comparability of revenue recognition across different businesses and industries. IFRS allows companies to elect fair value treatment of fixed assets, meaning their reported value can increase or decrease as their fair value changes. Both US GAAP and IFRS allow different types of non-standardized metrics (e.g. non-GAAP or non-IFRS measures of earnings), but only US GAAP prohibits the use of these directly on the face of the financial statements.

gaap vs ifrs

If you want to further your accounting knowledge, it’s critical to understand the standards that guide how companies record transactions and report finances. Here’s a look at the two primary sets of accounting standards—GAAP and IFRS—and how they compare. The main differences come in recognizing income or profits from an investment. Under GAAP, it’s largely dependent on the legal form of the asset or contract. Under IFRS, the legal form is irrelevant and only depends on when cash flows are received.

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Such judgment should primarily consider the nature of the activity (rather than the classification of the related items on the balance sheet), as mentioned above. Unlike US GAAP, this principles-based approach may lead to more diverse classification outcomes. Under US GAAP, defined benefit pension plans that present financial information under ASC 9603 and certain investments companies in the scope of ASC 9464 may be exempt from presenting a statement of cash flows. Without accounting standards, businesses could easily skew their financial results to make themselves look more successful.

Under GAAP, companies are allowed to supplement their earning report with non-GAAP measures. In contrast, IFRS considers each interim report as a standalone period, and while an MD&A is allowed, it is not required. US GAAP considers each quarterly report as an integral part of the fiscal year, and a Management’s Discussion and Analysis section (MD&A) is required. However, IFRS provides greater discretion with respect to which section of the Statement of Cash Flows these items can be reported in.

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In the United States, generally accepted accounting principles, or GAAP, are used by businesses with public financial disclosures. However, many countries are adopting the use of International Financial Reporting Standards, or IFRS, as an established international accounting system. GAAP is required for companies in the US, while IFRS is used by international businesses. The International Accounting Standards Board (IASB) has added intangible assets to its agenda, along with climate-related and other uncertainties.

  • Under US GAAP, bank overdrafts are considered a form of short-term financing and are generally6 presented as liabilities, with changes therein classified as financing activities (draws separate from repayments) in the statement of cash flows.
  • To conclude our section on how US GAAP and IFRS differ, another area of variance is the information required to be disclosed within the footnotes of the financial statements, as well as the terminology frequently found in filings.
  • International Financial Reporting Standards (IFRS), on the other hand, are a set of international accounting standards, which state how particular types of transactions and other events should be reported in financial statements.
  • The IFRS vs US GAAP refers to two accounting standards and principles adhered to by countries in the world in relation to financial reporting.
  • The Revenue Recognition Standard, effective 2018, was a joint project between the FASB and IASB with near-complete convergence.


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