IFRS vs. U.S. GAAP: What's the Difference?

IFRS vs. U.S. GAAP: An Overview

The International Financial Reporting Standards (IFRS), the accounting standard used in more than 144 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 the differences between the two accounting frameworks are highlighted below.

International Financial Reporting Standards (IFRS)

The treatment of acquired intangible assets helps illustrate why the International Financial Reporting Standards (IFRS) are considered more principles-based. Under IFRS, they are only recognized if the asset will have a future economic benefit and has measured reliability. Intangible assets are things like goodwill, R&D, and advertising costs.

Under IFRS, the last-in, first-out (LIFO) method for accounting for inventory costs is not allowed. Also, under IFRS, a write-down of inventory can be reversed in future periods if specific criteria are met.

Discontinued Operations

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 and coordinated plan to remove that separate line of business or area of operation, or is a subsidiary component that has been exclusively purchased with the 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.

U.S. GAAP

Acquired intangible assets under GAAP are recognized at fair value. 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 comparative analysis.

Discontinued Operations

Discontinued operations are company assets or components of a business that the organization has already discontinued or plans to discontinue.

Under GAAP, only discontinued operations that represent strategic shifts that will either have a major impact on an organization’s operations or its financial results must be reported. For example, if the organization decides to discontinue (or has already discontinued) a major geographic area, plans to discontinue a major line of business, or discontinue a major equity method investment.

In these cases, 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.