The two most common reporting standards used by companies around the world are Generally Accepted Accounting Principles in the United States of America (US GAAP) and International Financial Reporting Standards (IFRS). While US GAAP is local, IFRS has been adopted by over 144 counties in Europe, South America, and Asia.

A key difference between the two sets of standards is the US GAAP has a more rules-based approach, and IFRS leans towards a more principles-based approach. Under US GAAP there are specific standards that have been issued for each industry that a company operates in. However, IFRS guidelines are broader, which requires greater judgment and interpretation. Described below are some of the most notable differences between the two standards.

Presentation of the Financial Statements

Companies that follow US GAAP are required to list assets in the balance sheet in order of decreasing liquidity. Therefore, current assets must be listed before non-current assets. On the other hand, IFRS financial statements report assets, liabilities, and equity in the reverse order, and therefore, non-current assets/liabilities are recorded before current assets/liabilities and equity is reported before liabilities. In regards to the income statement, public companies in the United States are required to present three periods while companies following IFRS only need to report two periods.

Accounting for Inventory

Inventory accounting methods allowed under US GAAP include Last-In-First-Out (LIFO), First-In-First-Out (FIFO), and weighted-average cost. However, the LIFO method is not permitted under IFRS as the method often does not signify an accurate physical flow of goods, and it could result in lower net income being reported than actual.

Accounting for Intangible Assets

Under US GAAP, intangible assets are recorded on the balance sheet at cost. However, IFRS allows companies to record intangible assets at fair value, and therefore the asset values can change periodically. In addition, research and development costs are generally expensed as incurred under US GAAP, but these expenditures are allowed to be capitalized under IFRS if certain criteria are met.

Accounting for Fixed Assets

US GAAP requires that fixed assets such as buildings, equipment, and furniture be recorded at historical cost and then depreciated periodically based on the assets’ useful life. Under IFRS, fixed assets are initially recorded at cost but can later be revalued to fair value. Therefore, the value of fixed assets under IFRS can increase or decrease depending on the current fair value.

Accounting for Leases

The lease standards for both US GAAP (ASC 842) and IFRS (IFRS 16) requires leases with terms greater than one year to be reported on the balance sheet as right of use assets. One difference between the two standards is that US GAAP classifies the leases as either operating or finance leases whereas there is no classification of leases under IFRS (all leases are equivalent to finance leases under ASC 842). In addition, there is a de minimis exception under IFRS where lessees are allowed to exclude leases for lower value assets. There is no de minimis exception under US GAAP.

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