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GAAP and IFRS are two important rules for financial reporting used worldwide. Companies working in different countries need to understand them because they affect how financial statements are made and presented. 

Why GAAP is Important

• Same Rules for All: GAAP makes sure all companies follow the same rules, so investors and analysts can easily compare them.

• Clear Financial Reports: It helps show a company’s true financial position.

• Follows the Law: GAAP helps businesses meet financial rules in the United States.

Why IFRS is Important

• Easy to Compare: Helps compare financial reports of companies from different countries.

• Flexible: Allows companies to prepare reports in a way that fits their business.

• Used Worldwide: Many investors and governments accept and follow IFRS.

10 Main Differences Between IFRS and GAAP

1. Where They Are Used

IFRS is used in over 110 countries, including Europe, Asia, and South America. GAAP is only used in the United States. Companies working in both the U.S. and other countries may have more accounting challenges.

2. Rules vs. Principles

GAAP follows strict rules, while IFRS is based on general principles. GAAP has specific rules for different industries, while IFRS allows companies to decide how to apply its principles.

However, efforts have been made to make GAAP and IFRS more similar. For example, the GAAP rule on revenue (Topic 606) and the IFRS rule (IFRS 15) now follow the same basic approach.

3. Inventory Methods

Both GAAP and IFRS allow FIFO (First In, First Out), weighted-average cost, and specific identification to calculate inventory value. But GAAP also allows LIFO (Last In, First Out), which IFRS does not. LIFO can make a company’s income look lower and may not match how inventory moves in real life.

4. Changing Inventory Value

Both GAAP and IFRS let companies reduce inventory value if prices drop. But if prices go back up, only IFRS allows companies to increase the value again. GAAP does not allow this, so inventory values may change more under IFRS.

5. Changing Asset Values

IFRS allows companies to update the value of assets like inventory, buildings, equipment, and intangible items if their market value changes. The value can go up or down. GAAP only allows this for marketable securities.

6. Asset Value Losses

Both GAAP and IFRS let companies lower the value of long-term assets if their market price drops. But if the price goes back up, IFRS allows companies to increase the value again (except for goodwill). GAAP does not allow this, even if the asset’s value improves.

7. Intangible Assets

Under IFRS, companies can record the cost of creating intangible assets, like development costs, as an asset if certain conditions are met. These conditions include proving that the asset will bring future benefits.

Under GAAP, development costs are usually recorded as an expense when they happen. However, there is an exception for software. If the software is for external use, costs can be recorded as an asset after proving it is technically possible to complete. If the software is for internal use, only costs from the development stage can be recorded as an asset. IFRS does not have specific rules for software.

8. Fixed Assets

Under GAAP, long-term assets like buildings, furniture, and equipment are recorded at their original cost and depreciated over time.

Under IFRS, these assets are also recorded at cost at first, but later, their value can be adjusted to match market prices. IFRS also requires that different parts of an asset with different lifespans be depreciated separately. GAAP allows this but does not require it.

9. Investment Property

IFRS has a separate category for investment property. This includes property owned to earn rent or to sell later for a higher price. These properties are first recorded at their original cost but can later be adjusted to their market value. GAAP does not have a special category for investment property.

10. Lease Accounting

IFRS and GAAP follow similar rules for leases, but there are some key differences:

• IFRS helps companies to avoid low cost items leases but GAAP does not avoid any leases for low cost items.

• IFRS includes leases for some intangible assets, but GAAP does not cover any leases for intangible assets.

These differences are important for businesses working internationally. Investors and others who read financial reports need to understand them to correctly compare financial statements.

To learn more about the GAAP Vs IFRS, joining accounting courses helps learners to completely understand the concepts of GAAP and IFRS.