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What is IFRS? And what is GAAP? The main difference between IFRS and US GAAP is that GAAP is rule-based, while IFRS is principle-based. The difference mainly lies in the methodology used to evaluate an accounting treatment. Under GAAP, the research focuses more on the literature, while under IFRS the "facts pattern" is rigorously reviewed.
Much like the transition from the US system of weights and measures to the international metric system, GAAP (Generally Accepted Accounting Principles), an accounting standard used in the US, is slowly, but surely converging with IFRS (International Financial Reporting Standards), an accounting standard used across 110 countries globally.
The US Financial Accounting Standards Board (FASB) that endorses GAAP (or US GAAP), and the International Accounting Standards Board (IASB) that defines IFRS have both been working steadily towards convergence for a few years now. The convergence process is designed to figure out the significant differences between IFRS and US GAAP that need improvement. However, some differences will still continue to exist between the two systems.
The differences in the IFRS and GAAP accounting systems have a considerable impact on the financial statements, and consequently on the conduct of businesses. Some of the most common differences found in present practice are:
Relevance, reliability, comparability and understandability, are the ley characteristics in GAAP (in the exact hierarchy) where relevance and reliability are primary qualities, comparability is secondary and understandability is considered as user-specific quality
Relevance, reliability, comparability and understandability are also the key characteristics in IFRS. However, according to IASB framework (IFRS) its decision is not based upon individual users' specific circumstances
Although, US is clearly moving toward IFRS, a recent SEC (United States Securities and Exchange Commission) staff report seems to suggest some ambiguity in the timeline of its implementation. The staff report does not talk about whether US public companies should have the option to move to IFRS voluntarily, but, it seems to suggest that companies should not be allowed to adopt IFRS early, because it would compromise comparability with US companies using GAAP.
Regardless of whether the United States adopts IFRS in the near future or not, it would be prudent to keep in mind that significant accounting changes are on the cards for most companies. As the FASB and IASB continue to work towards finalizing accounting standards on revenue, leasing, and financial instruments, it is just a matter of time before these standards will start affecting virtually all companies, whether they report under GAAP or IFRS. Contact our financial experts to know more.