Loading the player...
A:

The International Financial Reporting Standards (IFRS) – the accounting standard used in more than 110 countries – has some key differences from the United States' Generally Accepted Accounting Principles (GAAP). At the conceptual level, IFRS is considered more of a principles-based accounting standard in contrast to GAAP, which is considered more rules-based. By being more principles-based, IFRS, arguably, represents and captures the economics of a transaction better than GAAP. Some of differences between the two accounting frameworks are highlighted below.

Intangibles

The treatment of acquired intangible assets helps illustrate why IFRS is considered more principles-based. Acquired intangible assets under GAAP are recognized at fair value, while under IFRS, it is only recognized if the asset will have a future economic benefit and has a measured reliability. Intangible assets are things like goodwill, R&D, and advertising costs.

Inventory Costs

Under IFRS, the last-in, first-out (LIFO) method for accounting for inventory costs is not allowed. Under GAAP, either LIFO or first-in, first-out (FIFO) inventory estimates can be used. The move to a single method of inventory costing could lead to enhanced comparability between countries, and remove the need for analysts to adjust LIFO inventories in their comparison analysis.

Write-Downs

Under IFRS, a write-down of inventory can be reversed in future periods if specific criteria are met. Under GAAP, once inventory has been written down, any reversal is prohibited.

Discontinued Operations

Discontinued operations are company assets or components that have either been disposed of or are being held for sale.

Under GAAP, discontinued operations receive unique presentation treatment. A company should only be reported as a discontinued operation on a financial statement if:

  • Resulting elimination: The disposal or pending sale results in the component or asset being completely removed from company operations.
  •  Continuing involvement: Once the disposal or sale is complete, there is no continuing involvement by the company with respect to the component or asset.

If these conditions are both present, the company is required to report on its income statement the results of operations of the asset or component for current and prior periods in a separate discontinued operations section.

The definition of discontinued operation is slightly different under IFRS guidelines. A company's asset or component is discontinued if the following are true:

  • The component has been disposed of or is classified as held for sale.
  • The component represents a separate line of business or area of operation; is part of a premeditated, coordinated plan to remove that separate line of business or area of operation; or is a subsidiary component that has been exclusively purchased with intent to resell.

An entity using IFRS rules can classify equity method investments as "held for sale," which is not possible under GAAP. There is also no condition precluding continuing involvement with IFRS treatment. Like GAAP, however, discontinued operations under IFRS are represented by their own section on an income statement.

To learn more, check out International Reporting Standards Gain Global Recognition.

RELATED FAQS
  1. How does inventory accounting differ between GAAP and IFRS?

    Learn about inventory costing differences between generally accepted accounting principles, or GAAP, and International Financial ... Read Answer >>
  2. Does US GAAP prefer FIFO or LIFO accounting?

    Investigate the use of LIFO and FIFO inventory accounting methods under U.S. GAAP, and learn why there is pressure from some ... Read Answer >>
  3. Who enforces GAAP?

    Take a deeper look at the private enforcement mechanisms behind the generally accepted accounting principles for American ... Read Answer >>
  4. How should a change in accounting principle be recorded and reported?

    Learn about changes in accounting principle and why businesses make them, as well as the reporting and recording requirements ... Read Answer >>
  5. How do you analyze inventory on the balance sheet?

    Learn how to analyze inventory using financial statements and footnotes by doing ratio analysis and performing qualitative ... Read Answer >>
  6. Why does GAAP require accrual basis rather than cash accounting?

    Discover why GAAP requires the accrual basis for accounting rather than the cash basis, and learn why it is important for ... Read Answer >>
Related Articles
  1. Investing

    International Financial Reporting Standards

    Learn about the purpose of the IFRS, as well as its benefits, goals, and fundamental difference from the U.S. GAAP.
  2. Investing

    Gauging the impact of combining GAAP and IFRS

    The convergence of accounting standards is changing the attitudes of CPAs and CFOs toward harmonization of international accounting.
  3. Investing

    Explaining amortization in the balance sheet

    Read to find out more about amortization, an important way to account for the value of intangible assets.
  4. Investing

    When & Why Should a Company Use LIFO

    By using LIFO (last in, first out) when prices are rising, companies reduce their taxes and also better match revenues to their latest costs.
  5. Investing

    Inventory Valuation For Investors: FIFO And LIFO

    We go over these methods of calculating this component of the balance sheet, and how the choice affects the bottom line.
  6. Investing

    GAAP vs. Non-GAAP: Which Should You Consider for Evaluation?

    Find out why GAAP and non-GAAP earnings diverged in 2015. Determine which one deserves investor focus, based on investor outlook and exclusion specifics.
  7. Investing

    Grasp the Accounting of Private Equity Funds

    Read about private equity accounting and how it is different than that of other investment vehicles. The nature of private equity makes a difference.
  8. Investing

    What are Financial Statements?

    Financial statements are a picture of a company’s financial health for a given period of time at a given point in time. The statements provide a collection of data about a company’s financial ...
  9. Investing

    12 Things You Need to Know About Financial Statements

    Before investing, discover 12 characteristics of financial statements that can help you evaluate companies and increase your chances of choosing a winner.
RELATED TERMS
  1. International Financial Reporting Standards - IFRS

    International Financial Reporting Standards (IFRS) are a set ...
  2. Discontinued Operations

    A segment of a company's business that has been sold, disposed ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures ...
  4. Proportional Consolidation

    Proportional consolidations is a former method of accounting ...
  5. International Accounting Standards - IAS

    An older set of standards stating how particular types of transactions ...
  6. Lower of Cost or Market Method

    The lower of cost or market method is a way to record the value ...
Hot Definitions
  1. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  2. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  3. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  4. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  5. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  6. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
Trading Center