The Difference Between Gaap and Ifrs: Admas University Collage

ADMAS UNIVERSITY COLLAGE
THE DIFFERENCE BETWEEN

GAAP AND IFRS
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ID NO.PGMGB/47/19/21
[JANUARY/21/2022]
The difference between GAAP and IFRS
Throughout the world. In order to present a fair depiction of the business
conducted, publicly-traded companies are required to follow specific accounting
guidelines when reporting their performance in financial filings.
For publicly-traded companies in the US, these rules are created and overseen by
the Financial Accounting Standards Board (FASB) and referred to as US Generally
Accepted Accounting Principles (US GAAP).
On the other hand, the International Accounting Standards Board (IASB) created
and oversees the International Financial Reporting Standards (IFRS), which is
followed by more than 144 countries.
US GAAP vs IFRS
US GAAP vs IFRS Convergence
Although we have seen moderate convergence of US GAAP and IFRS in the past,
the likelihood of a single set of international standards being adopted in the near-
term remains very low.
IFRS Standards by the Numbers (Source)
US GAAP vs. IFRS Key Trends
Given the statistics above, it is clear why it is important to understand the

differences between US GAAP and IFRS. More specifically, there are two
developing trends to be aware of:
1) Geographic Diversification
First, investment firms have been broadening the geographic scope of their
investments to consider opportunities overseas – moreover, 500+ foreign SEC
registrants use IFRS standards.
Increasingly, institutional investors are more open to making investments in the

emerging markets not only because there are more opportunities, but to further re-
risk their portfolio.
2) Cross-Border M&A Activity
Next, cross-border mergers and acquisitions (M&A) have emerged as method for
companies to enter to new markets, and global trends suggest increased deal
volume is on the horizon.
For an international M&A deal, the investment banker tasked with building the
M&A Model would be required to compare the financial reporting of both US and
non-US companies.
Key Differences between US GAAP vs IFRS
Generally, IFRS is described as more principles-based whereas US GAAP is

described as more rules-based. While there are examples to support these
descriptions, there are also meaningful exceptions that make this distinction not
very helpful.
The following discussion highlights specific differences between the two sets of
standards that may be useful to users of financial statements.
Overview of Differences
There are four main areas where US GAAP and IFRS diverge in financial
reporting:
Financial Statement Presentation
Recognition of Accounting Elements
Measurement of Accounting Elements
Disclosures and Terminology
US GAAP vs IFRS: Financial Statement Presentation
The following differences outlined in this section affect what financial information
is presented, how it is presented and where it is presented.
Income Statement
US GAAP requires presenting three periods, compared to two for IFRS. However,
many companies following IFRS choose to report three periods
Balance Sheet
US GAAP lists assets in decreasing order of liquidity (i.e. current assets before
non-current assets), whereas IFRS reports assets in increasing order of liquidity
(i.e. non-current assets before current assets).
Volkswagen Group (IFRS) vs. Ford Motor Co. (US GAAP) Balance Sheet
Comparison
The Statement of Cash Flows
US GAAP requires that interest expense, interest income and dividend income be
accounted for in the operating activities section, and dividends paid be reported in
the financing section. However, IFRS provides greater discretion with respect to
which section of the Statement of Cash Flows these items can be reported in.
Quarterly/Interim Reports
US GAAP considers each quarterly report as an integral part of the fiscal year, and
a Management’s Discussion and Analysis section (MD&A) is required. In contrast,
IFRS considers each interim report as a standalone period, and while an MD&A is
allowed, it is not required.
Non-Standardized Metrics
Both US GAAP and IFRS allow different types of non-standardized metrics (e.g.
non-GAAP or non-IFRS measures of earnings), but only US GAAP prohibits the
use of these directly on the face of the financial statements.
Non-GAAP Metric Example
Under GAAP, companies are allowed to supplement their earning report with non-
GAAP measures.
The most commonly used example is earnings before interest, taxes, depreciation
and amortization (EBITDA), a non-GAAP measure that includes adjustments for
non-cash items such as depreciation and non-recurring, one-time expenses to more
accurately represent the “true” performance of the business.
However, adjusted EBITDA will be included in a separate reconciliation section
rather than directly showing up on the actual income statement.
Recognition of Accounting Elements
Whether a company reports under US GAAP vs IFRS can also affect whether or
not an item is recognized as an asset, liability, revenue, or expense, as well as how
certain items are classified.
Research and Development (R&D) Costs
US GAAP requires that all R&D is expensed, with specific exceptions for
capitalized software costs and motion picture development. While IFRS also
expenses research costs, IFRS allows the capitalization of development costs as
long as certain criteria are met.
Income Taxes
Under US GAAP, all deferred tax assets (DTAs) are recognized and netted
out/offset with a valuation allowance when it is more likely than not (>50%) that
the company will not be able to use the DTA. But for IFRS, DTAs are only
recognized as assets when probable (>50%), so there is no need for valuation
allowances.
Investment Property
For US GAAP, all property is included in the general category of Property, Plant
and Equipment (PP&E). Under IFRS, when the property is held for rental income
or capital appreciation the property is separated from PP&E as Investment
Property.
Biological Assets
Under US GAAP, harvestable plants are included in inventory while production

animals are included in PP&E. On the other hand, living animals and plants that
can be transformed or harvested are considered biological assets and are measured
at their fair value until they can be harvested under IFRS.
US GAAP vs IFRS: Measurement of Accounting Elements
Reporting differences with respect to the process and amount by which we value
an item on the financial statements also applies to inventory, fixed assets and
intangible assets.
Inventory
Under US GAAP, both Last-In-First-Out (LIFO) and First-In-First-Out (FIFO)

cost methods are allowed. However, LIFO is not permitted under IFRS because
LIFO generally does not represent the physical flow of goods.
The table below shows the impact of this difference on other metrics and should be
useful when using these metrics across US GAAP and IFRS:
Fixed Assets
Both US GAAP and IFRS recognize fixed assets when purchased, but their
valuation can differ over time.
US GAAP requires that fixed assets are measured at their initial cost; their value
can decrease via depreciation or impairments, but it cannot increase.
IFRS allows companies to elect fair value treatment of fixed assets, meaning their
reported value can increase or decrease as their fair value changes. In addition,
IFRS requires separate depreciation processes for separable components of PP&E.
US GAAP allows but does not require such cost segregations.
FIN

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ADMAS UNIVERSITY COLLAGE

THE DIFFERENCE BETWEEN

US GAAP vs IFRS Convergence

IFRS Standards by the Numbers (Source)

US GAAP vs. IFRS Key Trends

Given the statistics above, it is clear why it is important to understand the

Increasingly, institutional investors are more open to making investments in the

Key Differences between US GAAP vs IFRS

Generally, IFRS is described as more principles-based whereas US GAAP is

Financial Statement Presentation

Recognition of Accounting Elements

Measurement of Accounting Elements

Disclosures and Terminology

US GAAP vs IFRS: Financial Statement Presentation

The Statement of Cash Flows

Non-GAAP Metric Example

Recognition of Accounting Elements

Research and Development (R&D) Costs

Under US GAAP, harvestable plants are included in inventory while production

Under US GAAP, both Last-In-First-Out (LIFO) and First-In-First-Out (FIFO)

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