Understanding the Differences Between GAAP and IFRS

This article focuses on the accounting principles that Aico relies on when delivering the core service of financial closing, as well as any other related tasks that should be completed before the closing period. 

GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards) are essential frameworks for accurate and consistent financial reporting. Understanding the differences between them helps businesses build investor confidence, make better decisions and maintain financial transparency.

These financial reporting standards apply to different markets: the first one is accepted globally (but initially in the US), while the second one applies mostly to the EU, Asia and South America. Still, the principles and rules result in clear financial reports and accounting activities that later will end in precise financial close.

Definitions of GAAP and IFRS

For accurate and essential financial reports, companies must follow one of these standards, combined with their local laws and rules. Let’s define each, for deeper understanding:

• GAAP: GAAP, short for The Generally Accepted Accounting Principles, is a set of accounting rules, standards and procedures that the US accountants must follow. GAAP was developed and updated by the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB), which both are non-profit organisations. 
• IFRS: IFRS, short for International Financial Accounting Standards, is a set of rules that standardises the presentation of the results and content of annual reports. It is used all over the world, including Europe and several countries in Asia and South America. 

The main difference between International Financial Reporting Standards (IFRS) and GAAP is in their global acceptance. While GAAP applies to the US accounting procedures, IFRS is globally accepted, including EU, the UK, Nordics and many other countries worldwide.

Differences Between GAAP and IFRS

In this section we’re addressing the differences in the fundamental principles and procedures. Before doing that, we must note that these sets of standards changed the way we report financial items. No matter where a company is based, following these standards accordingly results in concise and mistake-free financial closing processes. Now, let’s get deeper into the differences:

1. Rules vs. Principles

IFRS is based on principles, while GAAP is more focused on rules. The US companies should follow specific rules and guidelines under GAAP, but IFRS incorporates principles that the UK, Nordic, EU and foreign companies follow under various circumstances.

2. Location Relevance

IFRS is followed in more than 110 countries around the world including all of Europe and several countries in Asia and South America. GAAP is only used in the US. Accounting may be more complicated for businesses that operate in the US and EU or any other combination of US and other markets. 

3. Inventory Methods

They both allow First In, First Out (FIFO), weighted-average cost and certain identification techniques. Under GAAP, companies have more flexibility in inventory accounting methods, allowing the use of FIFO (First-In, First-Out), LIFO (Last-In, First-Out), weighted average cost and specific identification. On the other hand, IFRS permits only FIFO, weighted average cost and specific identification, specifically prohibiting LIFO.

4. Value Revaluations

Under IFRS, companies can revalue certain assets like property, plant and equipment to reflect fair market value. In the US, GAAP generally requires recording assets at their historical cost, while not allowing upward revaluation.

5. Impairment Losses

Under IFRS, impairment losses can be reversed in certain cases. GAAP prohibits the reversal of impairment losses once recorded.

Why Are GAAP and IFRS Important?

GAAP and IFRS provide certain benefits for more accurate financial assessments and reports, including:

GAAP

• Detailed compliance with U.S. regulations
• Consistency in domestic financial reporting
• High transparency for investors and regulators

IFRS

• Global comparability of financial statements
• Flexibility through principles-based guidelines
• Easier cross-border business integration

GAAP and IFRS provide structure, consistency and reliability to financial reporting. They ensure that financial statements are easy to understand and comparable, enabling investors, regulators and other stakeholders to make informed decisions.

How to Follow GAAP and/or IFRS?

Compliance with GAAP or IFRS requires companies to maintain accurate records, apply consistent accounting policies and stay updated with evolving standards, like this:

• GAAP: Follow FASB guidelines using the Accounting Standards Codification (ASC). Maintain detailed documentation and conduct regular audits.. 
• IFRS: Apply IASB-issued principles, especially in areas like fair value measurement and revenue recognition, where professional judgment is key. 

These sets of rules and principles ensure businesses are compliant, credible and strong. The GAAP and IFTS result in consistent reporting and simplified accounting activities, record maintenance and enhanced decision-making based on the available data. 

Aico, as a solution for the UK and European market, ensures the users follow the IFRS principles, resulting in an efficient financial close process. 

Are you interested to learn how Aico's solution complies to IFRS and all standards?

Final Thoughts

Although there are differences between GAAP and IFRS, they are both important in finance and accounting. Implementing them helps you adapt to specific rules, especially if your business operates globally. A clear understanding of these standards can improve financial transparency, support better decision-making and build trust with stakeholders.