Financial reporting and accounting are governed by a specific set of rules and standards. These standards can have wide variations depending upon the region.
The two most common and popular accounting practices that are followed in several countries are GAAP and IFRS. Both the procedures have distinct features and principles.
Key Takeaways
- GAAP (Generally Accepted Accounting Principles) is the accounting standard used in the United States, while IFRS (International Financial Reporting Standards) is used in various countries globally.
- IFRS income statements allow more flexibility in presentation than GAAP income statements, which have a more rigid format.
- IFRS tends to focus more on substance over form, whereas GAAP is more rules-based.
GAAP vs IFRS Income Statements
Under GAAP, the income statement is divided into two main sections: operating and non-operating. The operating section includes revenues and expenses directly related to the company’s primary business activities. IFRS does not require a separate non-operating section. Instead, the income statement is divided into two main sections: profit or loss from continuing operations and profit or loss from discontinued operations.
GAAP stands for Generally Accepted Accounting Principles. It is developed by Financial Accounting Standard Board. It is adopted only in the US. It is based on rules.
It does not allow write-down reversal of inventory. It segregates and displays the below net income in the income statement.
On the other hand, IFRS stands for International Financial Reporting Standard. It is developed by International Accounting Standard Board. It is adopted in over 144 countries. It is based on principles.
It allows a write-down reversal of inventory. There is no segregation of extraordinary items in the income statement.
Departure from GAAP should be followed by an individual or enterprise if there is a material misstatement on a financial statement or another related misleading.
Comparison Table
| Parameters of Comparison | GAAP | IFRS |
|---|---|---|
| Full form | Generally Accepted Accounting Principles | International Financial Reporting Standards |
| Basis | The system is rule-based | The system is principle-based |
| Details provided | More details are provided in a specific manner | Fewer details are provided and lower specification |
| Issuing board | GAAP is issued by Financial Accounting Standards Board (FASB) | IFRS as issued by International Accounting Standards Board (IASB) |
| Interest paid | Operating section | Operating or financing section |
What is GAAP Income Statement?
GAAP stands for Generally Accepted Accounting Principles.
It refers to accounting standards that are followed by the Securities and Exchange Commission (SEC) of the U.S. The issuing board of GAAP is Financial Accounting Standards Board or FASB.
The board has also published GAAP in Extensible Business Reporting Language or XBRL in the year 2008.
The development of GAAP was mainly by auditors of business enterprises. The initial accounting standards were by the American Institute of Certified Public Accountants or AICPA.
It was replaced by FASB in the year 1973. Departure from GAAP should be followed by an individual or enterprise if there is a material misstatement on a financial statement or other related misleading.
GAAP is achieved by basic principles, assumptions, and constraints.
The four principles of GAAP are that the historical cost principle would need companies to report assets and account liabilities acquisition, revenue recognition principle can record revenue earned and not received by companies, matching principle, and the Full disclosure principle.
The assumptions are related to a business entity, monetary unit principle, time period principle, and going concerned.
The constraints include the Consistency principle, objectivity principle, materiality principle, conservatism principle, and cost constraint.
The organizations which influence the development of GAAP are the United States Security and Exchange Commission, American Institute of Certified Public Accountants, Financial Accounting Standards Board (FASB), Government Finance Officer’s Association, Governmental Accounting Standards Board, and other influential organizations.
What is IFRS Income Statement?
IFRS stands for international financial reporting standards. They are a set of accounting standards that are issued under the IFRS Foundation and IASB board.
IFRS comprises a standardized technique of companies’ financial description about position and performance.
The financial statements of the company are made comparable with other boundaries and understandable with IFRS.
The relevance of IFRS for a company is with the listing of the shares in the public stock exchange.
Various national accounting standards have been replaced by IFRS around the world. Initially, IASC, or International Accounting Standards Committee was the accountancy body in various countries.
Later in the year 2001, IASB or International Accounting Standards Board replaced the body.
The standards are followed in over 140 jurisdictions. Ray J. Ball declared that IFRS has the potential to increase the quality of information and reduce the cost to compare various investment opportunities.
Apart from the opportunities, some scepticism was also expressed like the enforcement could bring lax copper regional differences can become obscure and fair emphasis may not be laid everywhere.
The basic features that are provided in IFRS are fair presentation, compliance, the accrual basis of accounting, going concerned, offsetting, frequency of reporting, comparative information, and consistency of the presentation.
The IFRS statements consist of a statement of the comprehensive income statement of financial position, statement of cash flows, statement of changes in equity, and notes.
Main Differences Between GAAP and IFRS
- In the GAAP income statement the dividends paid are accounted for in the financing section while in IFRS standards choice of categorizing dividends is given which can be in either the operating or financing section.
- GAAP does not allow asset revaluation after it is impaired while IFRS permits acids to be re-evaluated on their original cost and allow adjustment for depreciation.
- The GAAP approach of inventory valuation follows FIFO, LIFO, and weighted average methods while the I approach of inventory valuation is only based on FIFO and weighted average.
- The balance sheet of GAAP lists accounts in descending order of liquidity while the balance sheet of IFRS lists accounts in ascending order of liquidity.
- GAAP is only adopted in the US while IFRS is adopted globally in around 144 countries.
- https://www.sciencedirect.com/science/article/pii/S1061951809000287
- https://www.tandfonline.com/doi/abs/10.1080/0963818042000338988
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Impressive post. The details on both GAAP and IFRS are spot-on. Thank you.
Great explanation about the differences between GAAP and IFRS. It’s very comprehensive and clear. Thanks for sharing!
Although the comparison is accurate, it does not explain in detail which companies should use one or the other.
I disagree with the main differences between GAAP and IFRS, they are more complex than what was stated.
I find it impressive that this article covers both GAAP and IFRS accounting standards in such depth. Great job!
This post is really informative about GAAP and IFRS and gives detailed insights of both accounting standards.