The Difference between GAAP and IFRS
Published at : 08 Dec 2020
ZACH DE GREGORIO, CPA
First you need to understand what these things are. GAAP and IFRS are accounting standards. GAAP stands for Generally Accepted Accounting Principles which is the accounting framework used in the United States. IFRS stands for International Financial Reporting Standards which is the accounting framework used in the rest of the world.
What is an accounting standard? They are basically a set of guidelines you need to follow for accounting in your business. It is not laws, but it is really self-regulation where accountants have gotten together and agreed on the methods to use. When we talk about GAAP and IFRS, we are describing two different accounting standards.
In general, GAAP and IFRS are very similar already. The fundamentals of accounting are the same anywhere in the world. You still have the same financial statements and basic processes. However, there are still some significant differences.
The biggest difference between GAAP and IFRS is that GAAP is rules based, whereas IFRS is principles based. GAAP actually writes out all these different rules that US companies are required to follow, which does not leave much room for interpretation. IFRS focuses on the principles. This means that GAAP is much longer and more detailed than IFRS. The reason that GAAP is so detailed, is there have been some pretty big accounting scandals in the US. Every time a business has a major accounting scandal, more rules get added to the list, to make sure there are no misunderstandings in the future.
One of the biggest differences that has not yet been resolved is LIFO. LIFO means Last-In First-Out which is a method of valuing your inventory. US companies are allowed to use LIFO. International companies are not. A lot of US companies use LIFO, because most of the time it reduces your reported profit, which reduces your taxes. We are talking about a lot of money. No one knows for sure what the estimated tax savings is, but it is estimated at over $100 Billion in the US over 10 years. To give you an idea of how complicated this is, for treatment of LIFO to change, the US would have to change that part of the IRS tax code, which would require the US legislature to pass a law increasing corporate taxes by $100 Billion. This presents a real challenge. LIFO is just one example, but there are many more differences between GAAP and IFRS.
Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.