The Differences Between IFRS and GAAP

In the field of accounting, there are two widely recognized sets of standards that are used globally to maintain uniformity and accuracy in financial reporting which are the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP). Both IFRS and GAAP have their unique characteristics and rules that companies must adhere to when reporting their financial statements. In this blog post, we will discuss the differences between IFRS and GAAP and the benefits of pursuing a diploma in IFRS.

IFRS Course Details

Before diving into the differences between IFRS and GAAP, let’s take a look at some IFRS course details. Pursuing a diploma in IFRS is a great way to enhance your accounting knowledge and skills, and make yourself more marketable to potential employers. An IFRS course typically covers a range of topics, including the structure and framework of IFRS, financial statement preparation, and the application of IFRS to specific industries. The duration of an IFRS course can vary depending on the institution, but it typically ranges from three to six months. The eligibility criteria for an IFRS course may also vary, but generally, applicants are required to have a basic understanding of accounting principles and concepts.

What is IFRS vs GAAP?

The accounting world has two standard sets for financial reporting: International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). GAAP maintains financial trust while IFRS helps maintain transparency in the economy. Also, GAAP is mostly used in the USA while IFRS is used in as many as 132 jurisdictions globally..

Definition of Terms:

Before discussing the differences between IFRS and GAAP, let us understand both the terms individually. 

IFRS

International Financial Reporting Standards (IFRS) is a certification course offered by the ACCA body. The course aims at training candidates in accounting skills.  The IFRS course covers several topics like the IFRS framework and structure, IFRS application, financial statement preparation, and similar. Candidates who have basic knowledge of accounting can attempt to pursue the IFRS course. The IFRS course duration is of 3 to 6 months.

GAAP

The Financial Accounting Standards Board issues and revises the Generally Accepted Accounting Principles (GAAP). The same body also offers certification after the course to the candidates. The certification course of 6 months focuses on recognition, presentation, measurement, and similar topics for different ASUs and ASCs. The GAAP course is perfect for professional accountants, finance managers, MBA professionals, and other accounting graduates,

Key Differences Between IFRS and GAAP

Here is a differentiation between IFRS and GAAP based on some prominent factors. 

Treatment of Inventory

The first difference is based on the inventory treatment. IFRS treats inventory at Net Realizable Value, but GAAP treats inventory at Net Asset Value.

Intangibles

The next factor that lays a ground for differentiation between IFRS and GAAP is the intangibles. IFRS recognizes only those intangible assets that have economic value in the future. On the other hand, according to GAAP, companies must report the intangibles at a fair value. 

Rules vs Principles

IFRS is based on principles, but GAAP is more based on a set of rules that may change occasionally. As IFRS is based on principles, it is flexible and allows companies to work freely in many situations. GAAP is not very flexible because it binds the operations through a set of rules. Also, the FAS Board may change the GAAP rules as and when required. So, the companies working on the GAAP fundamentals should remain updated with the latest set of GAAP rules.

Inventory Valuation Methods 

IFRS: Does not allow the LIFO method, so companies must use FIFO or Weighted Average Cost methods for inventory valuation.

GAAP: Permits LIFO, FIFO, and Weighted Average Cost methods. LIFO is often used to match the most recent costs with current revenue, particularly when inventory prices rise.

Inventory Write-Down Reversals 

IFRS: Allows inventory write-down reversals. If the value of inventory increases after it has been written down, the reversal of the write-down can be recognized in the current period.

GAAP: Does not allow reversals of inventory write-downs. Once inventory is written down, it cannot be reversed, even if the value recovers.

Fair Value Revaluations

IFRS: Allows fair value revaluations for certain assets, such as property, plant, and equipment (PPE), if they have a readily determinable fair value.

GAAP: Does not allow revaluation of fixed assets to fair value, and assets must be carried at historical cost less accumulated depreciation.

Recognition of Revenue

According to IFRS, recognition of revenue only happens on delivery of value. GAAP has different rules of revenue recognition for different industries. Of course, the revenue recognition depends upon delivering a good or service.

Development Costs

IFRS: Allows capitalization of development costs when certain criteria are met (e.g., technical feasibility and future economic benefits are probable).

GAAP: Requires expensing of development costs as incurred, regardless of any future benefits or feasibility.

Fixed Assets

• IFRS: Fixed assets (PPE) can be revalued to fair value under certain circumstances.
• GAAP: Fixed assets must be carried at historical cost, and revaluation is not permitted.

Intangible Assets

• IFRS: Allows capitalization of intangible assets, such as development costs, if certain criteria are met. For purchased intangibles, fair value measurement is used.
• GAAP: Intangible assets are also capitalized if acquired, but development costs are typically expensed. Research costs are expensed immediately.

Financial Statement Presentation

• IFRS: Requires a single-step or multi-step income statement, depending on the company’s preference, but with certain required line items (e.g., operating profit).
• GAAP: Generally follows a multi-step income statement, with specific classifications of income and expenses like operating income, non-operating income, and taxes.

Extraordinary Items

IFRS: Does not permit the classification of items as “extraordinary.” All items are considered part of the normal business cycle unless disclosed separately.

GAAP: Previously allowed the classification of certain gains or losses as “extraordinary” if they were both unusual and infrequent. However, this is now eliminated under the revised standards.

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Implications for Businesses

• IFRS: Provides more flexibility and requires judgment-based decisions. It is used globally, especially by companies operating in multiple countries, making it favorable for multinational corporations.
• GAAP: More structured and detailed, offering certainty in compliance. It is predominantly used in the United States but can be more complex for businesses with international operations.

Global Operations

• IFRS: Widely adopted around the world (over 140 countries), making it more suitable for companies with international operations. It facilitates easier comparability of financial statements across borders.
• GAAP: Primarily used in the U.S. While it is well-established domestically, its application outside the U.S. is limited, which may lead to challenges for U.S.-based companies with global operations.

Financial Reporting

• IFRS: Emphasizes economic substance over legal form and is often more flexible in interpretation, giving companies the ability to report their financial position more broadly.
• GAAP: Focuses more on legal form and specific rules, which can lead to more rigid and precise financial reporting.

Compliance and Transition

• IFRS: Transitioning to IFRS from other standards, such as GAAP, can be challenging due to differences in principles and reporting formats. However, the widespread adoption of IFRS around the world has led to efforts to harmonize financial reporting standards.
• GAAP: U.S. businesses following GAAP have relatively more certainty, but transitioning to IFRS can be complex and costly, particularly for multinational corporations or companies looking to expand globally.

Classification of Liabilities

IFRS and GAAP are different in terms of liabilities, too. For example, GAAP may hold those instruments as equity that are considered a financial liability by IFRS. Similarly, some instruments considered equity by IFRS may not be equity according to GAAP. 

Both IFRS and GAAP have their fundamentals, principles, and standards. Both of them are short-term courses that enable the candidates to master different areas of accounting. 

Candidates can earn an average salary of Rs. 23.5 lacs per annum after completing the GAAP course. On the other hand, candidates with IFRS certification earn Rs. 24 lacs per annum according to 6figr.com. Zell Education will help you understand the courses better and choose the correct one according to your future aspects.

Career Growth

Understanding the differences between IFRS and GAAP is essential for accounting professionals who want to expand their career opportunities. Companies that operate globally often prefer employees who are knowledgeable about both sets of standards, as it makes it easier to reconcile financial statements and comply with different regulatory requirements. Pursuing a diploma in IFRS can be an excellent way to demonstrate your knowledge and skills to potential employers and position yourself for career growth.

Read this blog to know more about IFRS Career Scope

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Conclusion

In summary, IFRS and GAAP are two sets of accounting standards that are used globally to maintain consistency in financial reporting. While there are several differences between IFRS and GAAP, understanding these differences is crucial for accounting professionals who want to excel in their careers. Pursuing a diploma in IFRS can be an excellent way to enhance your knowledge and skills, and make yourself more marketable to potential employers. So, if you are interested in advancing your accounting career, consider enrolling in an IFRS course today! Reach out to us at Zell Education, and we’d be happy to counsel you.

FAQ’s on Differences Between IFRS and GAAP:

What is the main difference between IFRS and GAAP?

The main difference between IFRS and GAAP is their mode of working. IFRS is principle-based, while GAAP is rule-based. Also, there are many other differences, like IFRS is flexible but GAAP is prescriptive. Apart from this, IFRS offers flexibility in asset valuation, while GAAP focuses on the asset’s historical cost. 

What are the 4 standards of IFRS?

The 4 standards of IFRS are first-time adoption of International Financial Reporting Standards, Share-based payment, Business Combinations, and Insurance Contracts. 

What are the principal differences between IFRS and Indian GAAP?

The principal difference between IFRS and Indian GAAP is that IFRS is based on international accounting standards. It guides companies in reporting different transactions in their financial statements according to the country where the company is based. Indian GAAP guides companies to follow rules developed by the Ministry of Corporate Affairs in India for business houses and organizations. 

Satyamedh Nandedkar, a seasoned finance professional, holds ACCA, CA, US CMA & CS credentials. With 10+ years of experience, he’s a master ACCA tutor, IFRS trainer, adept in global financial standards, and a trusted advisor in navigating complex financial landscapes.