4 Oct 2022


Comparing IFRS to GAAP

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The International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP) are both accounting bodies containing rules and principles that govern the practice of accounting internationally and locally (Weygandt, Kieso & Kimmel, 2010). Though different in some ways, the IFRS and GAAP accounting standards also converge regarding shared goals and principles. For instance, one of the most recognized differences between the two is that whereas the IFRS is based on principles, the GAAP is based on rules. The significant convergence between the two, however, is that both contain particular similar accounting standards, rules, and principles. 

Differences in the Format of Statements of Financial Position and Balance Sheet 

The statements of financial position under the IFRS and the balance sheet under the GAAP differ in certain ways. Under the IRFS statement of the financial situation, there is a requirement of cash flow statement and equity changes. On the other hand, the GAAP requires the calculations in the balance sheet to include liabilities, equity, and assets in descending order based on their liquidity measures such that the most liquid assets like cash come first (Weygandt, Kieso & Kimmel, 2010). 

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However, Unlike the GAAP, the IFRS does not insist on a particular format, classification or order for a statement of a financial position. Here, one only needs to classify the current and noncurrent assets and liabilities as separate entities. The items under IFRS statement of financial position are presented in the order of long-term assets, followed by current assets, shareholder equity, long-term and current liabilities (Kasztelnik, 2015). For GAAP, the shareholder equity, unlike under IFRS, comes as the last item on the balance sheet. 

Differences concerning Objective of Financial Reporting 

There are no much differences regarding objectives of financial reporting in both of these accounting bodies. Both the IFRS and GAAP contain the principle and viewpoint that there has to be some faithful, fair and relevant reporting and representation of financial information (Lemus, 2014). According to Lemus (2014), relevant accounting information is one that would be useful to a user of the financial statements such as investors, regulators, the public or creditors. 

On the other hand, faithfully represented financial information is one that conforms to and is consistent with the standards of financial reporting as established in the industry (Weygandt, Kieso & Kimmel, 2010). However, the only notable slight difference between the two is that while GAAP’s conceptual framework is restricted to the legal and commercial environment in the US, the IFRS framework of relevancy and consistency applies across different nations. 

Usage of Accounting Terms under IFRS 

The term “statement of financial position” under the IFRS is synonymous with the balance sheet. The phrase describes the purpose of the balance sheet which is to show at any given point within the financial year or accounting calendar, the financial position of an entity concerning assets and liabilities (Kasztelnik, 2015). 

Further, the term “Share Capital Ordinary” under the IFRS is synonymous with common stock. This joint stock is used in the IFRS financial statements to mean the equity value that the owner of business has exchanged with liquid cash. 

Issues SEC must consider for US Adoption of the IFRS 

If the US Securities and Exchange Commission (SEC) were to adopt the IFRS accounting principles and change its accounting rules, there are some important factors and issues it has to take into account (Kasztelnik, 2015). Firstly, the SEC has to take into consideration the cost implications that such a change would have on millions of US businesses and corporation whose internal accounting rules adhere to the GAAP rules. The adoption, therefore, has to be designed in such a way that it does not substantially inconvenience US firms and accountants. Modification of the prevailing bookkeeping practices by these businesses will certainly require time and dollars. 

Further, such a change of accounting rule and principles would mean business organizations will have to invest in new computerized accounting or auditing systems and requirements and training of employees on the new IFRS accounting practice principles (Kasztelnik, 2015). Hence, the SEC has to weigh the financial burden to businesses and the likely benefits of adopting IFRS. Further, the SEC also has to consider issues of governance or company internal controls and disclosures under the Sarbanes-Oxley Act (Weygandt, Kieso & Kimmel, 2010). 

Rules on Revenue Recognition under IFRS versus GAAP 

Both the IFRS and GAAP rules on revenue recognition are such that they are neither too conservative nor too liberal in nature in such a way that promotes fraud or injures the interests of investors. Also, according to Kasztelnik (2015), there is a similarity between the two regarding revenue recognition. Both have value consistency and relevance, However, while the GAAP revenue recognition rules are specific in nature and do vary depending on the industry in which a firm operates, the IFRS principles of revenue recognition are rather general in nature. 

The IFRS rules regarding the recognition of income by companies are premised on probability and significance of the revenue realized. These rules also differ with regards to interim disclosure requirements, collectability threshold, loss reversal and effective dates (Kasztelnik, 2015, p.88) 

Definitions of Revenues and Expenses under IFRS 

Under the IFRS, revenue is defined as the "gross inflow of economic benefits arising from the ordinary operating activities". Expenses, on the other hand, are what a business spends on its daily operational activities to realize the revenues. Hence, in strict accounting terms, this definition does not per se include gains and losses. Gains and losses are not, in essence, part and parcel of a business organization's operating activities and do not affect in any way its operational performance. 

The Competitive Implications of Sarbanes-Oxley Act 

The major pro of the financial controls under the SOX for American companies is that they enhance the ability of the businesses to compete effectively in the global commercial market. This is primary because such controls under this Act makes the financial reporting and results of these corporations to be more comparable and acceptable on the global stage. Moreover, another positive competitive implication of SOX is that its internal control rules or requirements help reduce corporate fraud hence increasing the confidence of foreign investors in US financial system and markets. However, according to Weygandt, Kieso, and Kimmel (2010), the main con of the SOX internal controls is that they result in added costs of financial reporting and also make compliance complex and costly for American businesses. 


In summary, while the GAAP accounting body contains rules that apply only within the accounting framework of the US, the IFRS is a multifaceted body that comprises of a more detailed accounting principles and standards. However, both the IFRS and GAAP are aimed at regulating financial markets and systems to ensure consistency, relevance, and protection of investor interests. Though the move by the SEC to have GAAP adopt IFRS principles is welcomed, cost considerations on businesses must be had. 


Kasztelnik, K. (2015). The value relevance of revenue recognition under International Financial Rep[orting Standards. Accounting and Finance Research, 4 (3), 88-98. 

Lemus, E. (2014). The similarities and differnces between the financial reporting under United States GAAP versus IFRS. Global Journal of Management and Busines Research: D Accounting and Auditing, 14 (3), 1-7. 

Weygandt, J. J., Kieso, D. E., & Kimmel, ‎. D. (2010). Financial accounting, IFRS edition. Hoboken, NJ: John Wiley & Sons, Inc. 

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