What is IFRS?
IFRS stands for International Financial Reporting Standards. IFRS are rules, protocols, and compliance standards public companies must abide by when creating their public disclosures. The International Accounting Standards Board (IASB) established IFRS with the aim of harmonizing and subsequently converging financial metrics globally. IFRS standards are defined by ifrs.org as:
“a single set of accounting standards, developed and maintained by the International Accounting Standards Board 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 aspires to standardize accounting metrics to:
- Promote the development of an integrated financial and competitive market
- Encourage transparent financial information
- Protect investors
What’s the difference between IFRS and GAAP?
Let’s start with how they are similar. IFRS and Generally Accepted Accounting Principles (GAAP) are both systems of accounting that establish accounting standards and are regulated by governing bodies. They establish guidelines that companies use to record their finances, report financial statements, and accounting for like inventory, leasing, financial instruments, depreciation, and amortization.
IFRS and GAAP have many notable differences, which we’ll now explore.
Who uses IFRS and GAAP?
Over 144 countries use IFRS, making IFRS the global standard for accounting. The majority of G20 counties use IFRS apart from China, India, and Indonesia, which all have national accounting standards that resemble IFRS. In Japan, compliance with IFRS is optional.
GAAP is used notably by the United States. US foreign listed companies can now reconcile their financial statements according to IFRS instead of GAAP. But all other public companies must reconcile their financials according to GAAP.
What was the IAS?
Before IFRS, there were the International Accounting Standards (IAS). These old standards were replaced in 2001 by IFRS.
IAS was the first attempt at a single universal set of accounting standards way back in 1973 when IFRS was just a twinkle in finance's eye. These standards were originally issued by the International Accounting Standards Committee (IASC). Just like IFRS, the goal of IAS was to make global businesses easier to compare, aid in transparency, improve trust, and foster international trade.
What’s the difference between IFRS and GAAP’s approach to accounting?
IFRS is principles-based. Its proponents believe IFRS captures the economics of a transaction better than GAAP. On the other hand, GAAP is more rules-based.
What governing body regulates IFRS and GAAP?
The IASB is the accounting standards body for IFRS. GAAP, specifically, US GAAP, is regulated by the Security and Exchange Commission. The Financial Accounting Standards Board (FASB) are in charge of making up the rules that become GAAP.
What IFRS and GAAP standards are different?
Inventory: GAAP allows the inventory costing methodology Last In, First Out (LIFO), while LIFO is banned under IFRS. (LIFO may result in an artificially low net income and may not reflect a company’s true flow of inventory, which is why IFRS does not favor it.)
Inventory Write-down Reversals: GAAP stipulates that once inventory has been written down, it can’t be reversed. Under IFRS, inventory can be reversed if the market value increases. The result is that inventory valuation under IFRS may fluctuate.
Fair Value Representations: IFRS allows companies to re-evaluate inventories, property, plant & equipment, intangible assets, and investments in marketable securities if fair value can be measured. With the exception of market securities, this is prohibited under GAAP.
Impairment Losses: When market conditions change, IFRS allows impairment losses to be reversed for all assets except good will. GAAP does not allow this.
Intangible Assets: Internal costs for intangible assets are capitalized under IFRS after meeting certain criteria. Under GAAP, intangible costs are expensed as occurred. The exception is internally developed software.
Fixed Assets: IFRS allows long-lived assets to be initially valued at cost but then re-evaluated later if the market goes up or down. GAAP requires those assets to be valued at their historical cost and then depreciated accordingly.
Investment property: IFRS sees investment property as a distinct category. GAAP does not have this.
Lease accounting: IFRS allows lessees to exclude leases for low-valued assets. GAAP does not. What’s more, IFRS includes leases for certain intangible assets. GAAP excludes leases of intangible assets.