Understanding finance

US GAAP AND IFRS

John Royden, Head of Research

There are two sets of accounting standards which dominate the world. The IFRS Foundation has oversight of the International Accounting Standards Board who publish the IFRS or International Financial Reporting Standards. In the US, the FASB, or Financial Accounting Standards Board, publish US GAAP, or US Generally Accepted Accounting Principles.

As a general rule most companies around the world can choose whether they want to report under US GAAP or IFRS. US companies based overseas can use IFRS and overseas companies based in the US can still use IFRS rather than GAAP.

Much of US GAAP and IFRS is very similar. My impression is that where there are differences, US GAAP is more prescriptive than IFRS, which allows more choice.

For example, the cashflow statement divides into (a) operations, (b) financing and (c) investment. US GAAP tells you exactly where to put items like dividends and interest, whereas IFRS allows you a choice of one or another cashflow category. IFRS allows the balance sheet to better reflect market values by allowing companies to revalue their properties and long lived assets upwards. US GAAP does not.

Both US GAAP and IFRS have different approaches to incorporating pension related changes into the Profit and Loss statement, which are equally complex in both cases.

Minor differences persist in terms of tests for qualifications, such as when an operating lease (renting an asset) is taken onto a balance sheet as an asset and a debt (to avoid off-balance sheet financing being disguised).

US GAAP uses the LIFO (Last In First Out) method to value inventory, whereas IFRS compels the use of FIFO (First in First Out). Most of the time this allows US GAAP companies to make lower profits and so pay lower taxes.

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