How Does US Accounting Differ From International Accounting?

us gaap accounting principles vs. international financial reporting standards

Although we have seen moderate convergence of US GAAP and IFRS in the past, the likelihood of a single set of international standards being adopted in the near term remains very low. The primary difference between the two systems is that GAAP is rules-based and IFRS is principles-based. The point of IFRS is to maintain stability and transparency throughout the financial world.

When a company holds investments such as shares, bonds, or derivatives on its balance sheet, it must account for them and their changes in value. Both GAAP and IFRS require investments to be segregated into discrete categories based on asset type. Perhaps the most notable difference between GAAP and IFRS involves their treatment of inventory.

Additional Guidelines

Kelly Main is staff writer at Forbes Advisor, specializing in testing and reviewing marketing software with a focus on CRM solutions, payment processing solutions, and web design software. Before joining the team, she was a content producer at Fit Small Business where she served as an editor and strategist covering small business marketing content. us accounting vs international accounting She is a former Google Tech Entrepreneur and holds an MSc in international marketing from Edinburgh Napier University. Magazine and the founder of ProsperBull, a financial literacy program taught in U.S. high schools. Accountants must, to the best of their abilities, fully and clearly disclose all the available financial data of the company.

us gaap accounting principles vs. international financial reporting standards

Under IFRS, the last-in, first-out (LIFO) method for accounting for inventory costs is not allowed. Also, under IFRS, a write-down of inventory can be reversed in future periods if specific criteria are met. In 2015, US GAAP effectively matched IFRS’s treatment of netting these costs against the amount of outstanding debt, similar to debt discounts. This leads to the debt being recognized on the Balance Sheet as a liability (the net amount outstanding) not both an asset (the capitalized issuance cost) and a liability (the outstanding principal). In effect, this facilitates the standardization and comparability of revenue recognition across different businesses and industries.

Principle of Permanence of Methods

However, many countries are adopting the use of International Financial Reporting Standards, or IFRS, as an established international accounting system. GAAP is the set of accounting guidelines used for every publicly traded company in the United States. It is comparable to the International Financial Reporting Standards (IFRS) that many non-U.S. While U.S. companies only need to follow GAAP domestically, if internationally traded or operating with a significant international presence, they often must adhere to the IFRS as well.

  • IFRS generally uses the expected value in its measurement of the amount of the liability recognized, while the amount under US GAAP depends on the distribution of potential outcomes.
  • By being more principles-based, IFRS, arguably, represents and captures the economics of a transaction better than GAAP.
  • With regards to how revenue is recognized, IFRS is more general, as compared to GAAP.
  • There is also no condition precluding continuing involvement with IFRS treatment.
  • Investors increasingly make their investment decisions in a global context of comparing investments in companies located in many countries that use different accounting, auditing, and other business practices.