Differences between GAAP and IFRS
GAAP vs. IFRS[edit]
Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) are the two primary frameworks for financial accounting. GAAP is predominantly used in the United States, while IFRS is utilized in over 140 jurisdictions globally.[1][2] The core distinction lies in their foundational approach: GAAP is considered a rules-based system, offering specific and detailed guidelines, whereas IFRS is principles-based, providing a broader framework that requires more professional judgment.[3][4][5] These differing philosophies lead to several key operational distinctions in financial reporting.
One of the most notable differences is in the valuation of inventory. GAAP permits the use of the Last-In, First-Out (LIFO) method, which IFRS prohibits. IFRS allows for the First-In, First-Out (FIFO) and weighted-average cost methods, both of which are also permissible under GAAP. Another significant point of divergence is the treatment of asset revaluation. Under IFRS, companies can revalue certain assets, such as property, plant, and equipment, to their fair market value. In contrast, GAAP generally requires these assets to be carried at their historical cost.
The accounting for development costs also differs. IFRS allows for the capitalization of development costs as an asset under specific criteria, while GAAP generally requires these costs to be expensed as they are incurred, with some exceptions for software development. Furthermore, should an asset's value be impaired, IFRS permits the reversal of that impairment loss (except for goodwill) if the asset's value recovers. GAAP, however, does not allow for the reversal of impairment losses.
The presentation of financial statements also highlights the differences between the two standards. On the balance sheet, GAAP lists assets in order of decreasing liquidity, starting with current assets. IFRS takes the opposite approach, listing non-current assets first. Prior to a 2015 update, GAAP allowed for the separate reporting of "extraordinary items," a classification for unusual and infrequent gains or losses. This classification has since been eliminated under GAAP and is not a feature of IFRS.
Efforts have been made to converge the two sets of standards to simplify international financial reporting, but significant differences remain. The choice between GAAP and IFRS is largely dictated by the geographic location of a company and the capital markets in which it operates.
Comparison Table[edit]
| Category | GAAP | IFRS |
|---|---|---|
| Approach | Rules-based, providing specific guidance.[3][4] | Principles-based, offering a general framework.[3][4] |
| Inventory Valuation (LIFO) | Permitted.[3] | Prohibited.[3] |
| Asset Revaluation | Generally prohibited for fixed assets; carried at historical cost. | Permitted for certain assets like property, plant, and equipment. |
| Reversal of Asset Impairments | Prohibited. | Permitted (except for goodwill) if value recovers. |
| Development Costs | Generally expensed as incurred. | Capitalized if certain criteria are met. |
| Balance Sheet Presentation | Assets listed in decreasing order of liquidity. | Assets listed in increasing order of liquidity. |
| Extraordinary Items | Concept eliminated; previously shown separately. | No concept of extraordinary items. |
References[edit]
- ↑ "wikipedia.org". Retrieved February 11, 2026.
- ↑ "ifrs.org". Retrieved February 11, 2026.
- ↑ 3.0 3.1 3.2 3.3 3.4 "nowcfo.com". Retrieved February 11, 2026.
- ↑ 4.0 4.1 4.2 "prophix.com". Retrieved February 11, 2026.
- ↑ "workiva.com". Retrieved February 11, 2026.
