Difference Between GAAP and IFRS

IFRS Vs GAAP is the most debatable topic in accounting where the former is defined as the financial reporting method having universal applicability while the latter are the set of guidelines made for financial accounting. Since past few years, IFRS has gained significant importance, due to which over hundred countries of the world have adopted IFRS as the standard for accounting. The issuing organizations of the two are continuously working on their convergence.

IFRS or otherwise known as International Financial Reporting Standardimplies a principle-based set of standards. On the other hand Generally Accepted Accounting Principles (GAAP) is the assemblage of rules, conventions, and procedures, that explains the accepted accounting practice. There is only a few difference between IFRS and GAAP, which are discussed in this article except in detail.

Comparison Chart

BASIS FOR COMPARISON	GAAP	IFRS
Acronym	Generally Accepted Accounting Principles	International Financial Reporting Standard
Meaning	A set of accounting guidelines and procedures, used by the companies to prepare their financial statements is known as GAAP.	IFRS is the universal business language followed by the companies while reporting financial statements.
Developed by	Financial Accounting Standard Board (FASB).	International Accounting Standard Board (IASB).
Based on	Rules	Principles
Inventory valuation	FIFO, LIFO and Weighted Average Method.	FIFO and Weighted Average Method.
Extraordinary items	Shown below.	Not segregated in the income statement.
Development cost	Treated as an expense	Capitalized, only if certain conditions are satisfied.
Reversal of Inventory	Prohibited	Permissible, if specified conditions are met.

Key Differences Between GAAP and IFRS

The important difference between GAAP and IFRS are explained as under:

1. GAAP stands for Generally Accepted Accounting Principles. IFRS is an abbreviation for International Financial Reporting Standard.
2. GAAP is a set of accounting guidelines and procedures, used by the companies to prepare their financial statements. IFRS is the universal business language followed by the companies while reporting financial statements.
3. Financial Accounting Standard Board issues GAAP (FASB) whereas International Accounting Standard Board (IASB) issued IFRS.
4. Use of Last in First out (LIFO) is not permissible as per IFRS which is not in the case of GAAP.
5. Extraordinary items are shown below the statement of income in case of GAAP. Conversely, in IFRS, such items are not segregated in the statement of income.
6. Development Cost is treated as an expense in GAAP, while in IFRS, the cost is capitalised provided the specified conditions are met.
7. Inventory reversal is strictly prohibited under GAAP, but IFRS allows inventory reversal subject to specified conditions are fulfilled.
8. IFRS is based on principles, whereas GAAP is based on rules.

Similarities

Both are guiding principles that help in the preparation and presentation of a statement of accounts. A professional accounting body issues them, and that is why they are adopted in many countries of the world. Both of the two provides relevance, reliability, transparency, comparability, understandability of the financial statement.