The world is changing and growing smaller by the day. Suddenly, travelling between continents is as simple as driving to the airport, or opening the Internet. To accommodate the shrinking barriers between countries, the world has changed its financial reporting practices.
Each country used to have their own tax and accountancy standards. Then, as more and more countries went international, remote working and a freer movement of people made change necessary.
In the last decade, there has been a global move towards the adoption of global standards. Now, instead of hundreds of different and competing standards, there are essentially two. U.S. GAAP (Generally Accepted Accounting Principles) is applicable for US entities. IFRS (International Financial Reporting Standards) is either permitted or required in over 140 reporting jurisdictions to date across Europe, Africa, Middle East, Asia-Oceanica and the Americas.
Where are you based?
International Financial Reporting Standards (IFRS) is a set of accounting standards, developed by the International Accounting Standards Board (IASB), that is quickly becoming the global standard for the preparation of public company financial statements.
The Generally Accepted Accounting Principles in the U.S. (US GAAP) refers to the accounting rules used in the U.S. in the preparation of financial statements for an assortment of entities, including privately held and publicly traded companies.
IFRS ensures comparability and comprehension of international business, whereas U.S. GAAP applies only to the U.S. However, the issuing authorities for both sets of standards, the IASB (IFRS) and the FASB (U.S. GAAP) are constantly working on convergence.
Principles-Based vs. Rules-Based
The fundamental difference between the two standards is that IFRS is principle-based and U.S. GAAP is rule-based. But what does this mean?
The IFRS allows you to make certain interpretations based on overall patterns. In similar situations, different interpretations might be made according to their context.
U.S. GAAP reporting, on the other hand, is based on the published rules from the IRS. This sets out a black-and-white situation for those filing accounts.
Differences between IFRS and U.S. GAAP
There are many similarities between U.S. GAAP and IFRS in how financial statements are recorded. For example, both include a Statement of Financial Position and an Income Statement, in addition to supplementary notes to the financial statements.
There are some key differences between the two standards, however. These include:
- Consolidation — U.S. GAAP prefers a risks-and-rewards model. IFRS favours a control model.
- Inventory — Under IFRS, only FIFO can be used (a firm records the first units purchased as the first units sold: First in, First Out), while under U.S. GAAP, companies have the choice between FIFO and LIFO (a firm records the last units purchased as the first units sold: Last in, First Out).
- Extraordinary items – Under U.S. GAAP, these costs are shown below the statement of income. Conversely, in IFRS, such items are not segregated in the statement of income.
What’s the Low Down?
As more countries adopt IFRS, and as more U.S. entities expand globally, it’s unavoidable that how your company operates and reports its financial data will be impacted by IFRS. It’s also important to be able to foresee the impact that international merger and acquisition activity will potentially have on how you prepare your financial statements.
Regardless of where you are based, in order to be successful in U.S. capital markets and to assist investors, it is increasingly important to be financially bilingual.
If you’d like to see for yourself how the Global Shares financial reporting software can help your company, book a one-on-one, no-obligation consultation today and we’ll demonstrate our award-winning software.