IFRS vs US GAAP: what are the main differences ?

Accounting, while being a discipline structured by precise standards, varies significantly from one region to another.

Two of the largest accounting standard systems, the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles in the United States (US GAAP), are used worldwide, but have significant differences in terms of accounting.

In this article, we will deeply analyze the main differences between these two reporting standards.

Understanding these differences is essential not only for accountants and auditors, but also for investors, financial analysts, and anyone interested in reading and comparing the financial statements of companies from different jurisdictions.

Different accounting philosophies : Rule-based vs. Principle-based

Before diving into the specific differences between the IFRS and US GAAP standards, it’s important to understand that these systems are rooted in two distinct philosophies.

US GAAP is generally described as being “rule-based,” while IFRS is considered “principle-based.”

Rule-based: US GAAP standards

In the rule-based system of US GAAP, detailed rules are provided for each accounting situation.

This approach attempts to cover all possible situations, thus minimizing ambiguity. However, it can also increase complexity due to the large number of specific rules.

Principle-based: IFRS standards

The principle-based approach of IFRS provides general guidelines that can be applied to various accounting situations.

This approach offers greater flexibility, allowing for better adaptation to a wide variety of situations. However, it can also lead to greater variability in the application of standards.

Impact on accounting standards and their applications

Understanding the distinction between rule-based and principle-based approaches is a key factor in deciphering the differences between IFRS and US GAAP. These foundational philosophies influence how each set of standards is interpreted and applied in practice.

This is particularly important when comparing financial information prepared according to these two different standards. The philosophical differences can have a significant impact on how transactions and events are accounted for and, consequently, can influence key financial ratios and reported financial performance.

Moreover, these differences can affect how analysts and investors evaluate a company. For example, a company that appears to have a strong balance sheet under US GAAP may appear weaker under IFRS, and vice versa.

It is therefore essential to keep these philosophical differences in mind when examining the more specific differences between these two sets of standards in the following sections of this article. They shed light on the raison d’être of each set of standards and provide valuable context for understanding why certain differences exist and how they can affect financial information.

Revenue recognition : IFRS vs US GAAP

Revenue recognition is an area where the differences between IFRS and US GAAP are particularly notable. The treatment of revenue in each standard is governed by different specific standards, namely IFRS 15 for IFRS and ASC 606 for US GAAP.

The IFRS 15 model

According to IFRS 15, revenue is recognized when control of a good or service is transferred to a customer, and to the extent of what the entity expects to receive in exchange for those goods or services.

IFRS 15 emphasizes the identification of distinct performance obligations in a contract and proposes a five-step model for revenue recognition, which could allow for greater flexibility in revenue accounting.

The ASC 606 model

On the other hand, US GAAP, under the ASC 606 standard, also applies a control-based model, with a five-step process similar to that of IFRS.

However, US GAAP includes more detailed guidance for certain industries and specific transactions, which can result in differences in revenue accounting compared to IFRS.

Impact of differences between IFRS and USGAAP

Here’s an example: software license revenues are generally recognized over time under IFRS, while they may be recognized at the time of transfer under US GAAP, depending on the specific terms of the contract.

It is also important to note that, although IFRS 15 and ASC 606 are the result of a joint effort by the FASB and the IASB to harmonize revenue recognition, there are still divergences.

Even though both standards are centered on the principle of control transfer for revenue recognition, their applications vary due to differences in implementation details, thus leading to different outcomes in revenue accounting.

Companies must therefore be aware of these differences when applying revenue recognition standards.

Inventory accounting : IFRS vs US GAAP

Inventory accounting is another key area of difference between IFRS and US GAAP.

Here, IFRS’s IAS 2 “Inventories” and US GAAP’s ASC 330 “Inventory” respectively govern the treatment of inventories.

The IAS 2 method

IAS 2 allows the use of the First-In, First-Out (FIFO) or weighted average methods for valuing inventories.

It expressly prohibits the use of the Last-In, First-Out (LIFO) method, as it can lead to an undervaluation of inventories during periods of inflation.

The ASC 330 method

Unlike IFRS, US GAAP allows the use of the LIFO method in addition to FIFO and the weighted average.

This is a major difference because the use of LIFO can have a significant impact on the value of inventories and, consequently, on the balance sheet and income statement.

Comparison of the two standards: the impact of LIFO

In an inflationary context, where the cost of goods increases over time, the LIFO (Last-In, First-Out) method assumes that the last goods purchased (which are usually the most expensive during inflation) are the first to be sold. This means that the cost of goods sold, which is deducted from revenue to calculate profit, is higher with LIFO than with FIFO (First-In, First-Out).

At the same time, the goods that remain in inventory according to the LIFO method are those that were purchased first, therefore at a lower cost. This means that the inventory value reported on the balance sheet is lower with LIFO than with FIFO during a period of inflation.

During inflation, the LIFO method therefore leads to an undervaluation of inventories compared to the FIFO method. This can have a significant impact on financial indicators such as EBITDA, and affect the perception of financial performance and the income statement of a company.

Asset valuation and depreciation: IFRS vs US GAAP

The valuation and depreciation of assets are governed by different standards under IFRS and US GAAP.

IFRS’s IAS 16 and IAS 38 deal with tangible and intangible assets respectively, while US GAAP’s ASC 360 and ASC 350 cover these areas.

The valuation methods in IAS 16 and IAS 38 standards

IAS 16 allows companies to choose between the cost model and the revaluation model to value their tangible and intangible assets.

The cost model depreciates the asset over its useful life, while the revaluation model allows for revaluing assets to their fair value at the closing date.

Valuation according to ASC 360 and ASC 350 standards

US GAAP generally does not allow for the revaluation of assets to their fair value, except in very limited circumstances. Assets are generally recorded at historical cost and depreciated over their useful life.

Comparison of the two standards

The main difference between IFRS and US GAAP lies in the possibility of revaluing assets. This can lead to significant differences in the value of assets reported in financial statements, especially in a bull market.

Conclusion

Although IFRS and US GAAP aim for the same goal, to provide a clear and accurate representation of a company’s financial position, these standards approach this goal through different paths.

These differences can have a significant impact on how companies are valued and compared. Furthermore, in an increasingly globalized world, the importance of greater convergence between IFRS and US GAAP becomes more evident.

As IFRS and US GAAP continue to evolve, new challenges emerge. One of them is the incorporation of environmental, social, and governance (ESG) reporting into accounting standards. As the importance of sustainability and corporate social responsibility gains prominence, how these factors are reflected in financial statements will become a crucial issue. That’s why IFRS is trying to integrate ESG into their reporting standards.

Ultimately, the goal of greater harmonization of international accounting standards is a long-term challenge, requiring close collaboration between standard setters, businesses, auditors, and users of financial information.

In the meantime, understanding the key differences between IFRS and US GAAP remains an invaluable skill for those engaging in the complex world of international accounting.

Feel free to contact our accounting experts if you are seeking advice on applying IFRS or ESG standards.