GAAP vs IFRS

 "GAAP vs IFRS - Which one is better ….??

1. Local vs. Global

IFRS is used in more than 110 countries around the world, including the EU and many Asian countries. GAAP, on the other hand, is only used in the United States.

2. Rules vs. Principles

GAAP tends to be more rules-based, while IFRS tends to be more principles-based. Under GAAP, companies may have industry-specific rules and guidelines to follow, while IFRS has principles that require judgment and interpretation to determine how they are to be applied in a given situation.

3. Inventory Methods

Both GAAP and IFRS allow First In, First Out (FIFO), weighted-average cost, and specific identification methods for valuing inventories. However, GAAP also allows the Last In, First Out (LIFO) method, not allowed under IFRS.

4. Inventory Write-Down Reversals

Both methods allow inventories to be written down to market value. However, if the market value later increases, only IFRS allows the earlier write-down to be reversed. Under GAAP, reversal of earlier write-downs is prohibited.

5. Fair Value Revaluations

IFRS allows revaluation of the following assets to fair value if fair value can be measured reliably: inventories, property, plant & equipment, intangible assets, and investments in marketable securities. This revaluation may be either an increase or a decrease to the asset’s value. Under GAAP, revaluation is prohibited except for marketable securities.

6. Impairment Losses

Both standards allow for the recognition of impairment losses on long-term assets when the market value of an asset declines. But, IFRS allows impairment losses to be reversed for all types of assets except goodwill. GAAP prohibits reversals.

7. Intangible Assets

Internal costs to create intangible assets, such as development costs, are capitalized under IFRS.

Under GAAP, development costs are expensed as incurred, with the exception of internally developed software.

8. Fixed Assets

GAAP requires that long term assets be valued at historic cost and depreciated appropriately. Under IFRS, these same assets are initially valued at cost, but can later be revalued up or down to market value. Any separate components of an asset with different useful lives are required to be depreciated separately under IFRS. GAAP allows for component depreciation, but it is not required.

9. Investment Property

IFRS includes the distinct category of investment property, which is defined as property held for rental income or capital appreciation. Investment property is initially measured at cost, and can be subsequently revalued to market value. GAAP has no such separate category.

10. Lease Accounting

While the approaches under GAAP and IFRS share a common framework, there are a few notable differences. IFRS has an exception, which allows lessees to exclude leases for low-valued assets, while GAAP has no such exception.