What Are the Differences between GAAP and IFRS?

Geri Terzo
Geri Terzo
Businessman with a briefcase
Businessman with a briefcase

Both the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP) are accounting standards used by businesses and organizations when filing financial statements. As the name suggests, the former is more international in nature, and countries the world over continue to adapt to this measure. GAAP are largely North American guidelines that are used throughout the United States and Canada. There are unique features to both GAAP and IFRS standards, and there are currently no universal or global standards that must be followed by all entities when reporting financial results.

In the U.S., GAAP standards are accessible to profit and nonprofit organizations that are registered with the Securities and Exchange Commission (SEC). The IRFS guidelines are enforced by the International Accounting Standards Board (IASB) in London and are reserved for profit entities only. Industry participants suggest that any global standard that might exist would be most effective as a combination of both GAAP and IFRS requirements.

Companies that are filing financial results either under GAAP and IFRS guidelines must disclose any information relating to profits and liabilities as required by either standard. Under the IFRS rules, reporting entities must also issue statements that they are in fact operating in agreement with those disclosure guidelines. This is not a requirement under GAAP standards. Another similarity is that agencies reporting under either standard cannot change the influence of any statement by drawing attention to it with bold type. A benefit of some international or global standard would be that competing companies around the world would report financial results in the same manner, which would make the comparison of results more streamlined.

The most compelling difference between GAAP and IFRS is in the way that financial information is presented. Changes in equity ownership are illustrated differently between GAAP and IFRS. When owners of the reporting agency make a change to stock ownership in that company or new equity distributions occur, the information must be reported within the financial statement under IFRS. Under GAAP, however, changes in equity ownership may sometimes be included as part of a notes section within a balance sheet.

Dozens of countries adhere to IFRS standards, and the list continues to grow. More countries are allowed or required to use these financial guidelines than are actually in full compliance with IFRS. The U.S. SEC may eventually shift toward the international standards, but there is no assurance of that, especially as some market participants call for new global standards to be formed.

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