US GAAP was introduced in the 1930s, during the Great Depression, in response to a need for consistent accounting standards across businesses. IFRS was introduced in 2001, with the goal of providing a single set of global accounting standards.
Currently, more than 120 countries use IFRS, while the US continues to use US GAAP. Some experts believe that eventually, all countries will switch to IFRS.
There are several reasons why IFRS was introduced and adopted. First, it levels the playing field for businesses operating in multiple countries, as they only need to comply with one set of accounting standards. Second, it makes comparisons between companies easier, as all companies using IFRS will report their financials in the same way. Finally, it reduces the cost of compliance for companies, as they no longer need to maintain separate accounting systems for different countries.
The main differences between US GAAP and IFRS are:
Revenue recognition: Under US GAAP, revenue is recognized when it is earned, while under IFRS, revenue is recognized when it is realized or realizable.
Inventory valuation: Under US GAAP, inventory must be valued at the lower cost or market, while under IFRS, inventory can be valued at either cost or net realizable value.
Depreciation: Under US GAAP, depreciation must be calculated using the straight-line method, while under IFRS, companies can choose from a number of different methods.
Financial instruments: Under US GAAP, financial instruments must be measured at amortized cost, while under IFRS, they can be measured at either amortized cost or fair value.
Leases: Under US GAAP, leases must be classified as either operating or capital, while under IFRS, they can be classified as either operating, finance, or sales-type.
Income taxes: Under US GAAP, income taxes are deferred until the tax return is filed, while under IFRS, they are recognized in the period in which they are incurred.
Employee benefits: Under US GAAP, employee benefits must be accrued and reported on the balance sheet, while under IFRS, they can be accounted for using a number of different methods.
Share-based payments: Under US GAAP, share-based payments are expensed as they are incurred, while under IFRS, they can be either expensed or capitalized.
Business combinations: Under US GAAP, business combinations must be accounted for using the purchase method, while under IFRS, the acquisition method can be used.
Consolidation: Under US GAAP, unconsolidated subsidiaries must be reported as equity investments, while under IFRS, they can be reported using the fair value or equity methods.
As you can see, there are a number of key differences between US GAAP and IFRS. While both sets of standards are designed to provide accurate financial reporting, they do so in different ways. Ultimately, the choice of which set of standards to use is up to the individual company.
I am not an accountant. This article was written as an educational aid only. For specific advice, please consult a qualified accountant.
Sources:
https://www.accountingtools.com/articles/2017/5/differences-between-us-gaap-ifrs.html
https://www.investopedia.com/ask/answers/042415/what-difference-between-generally-accepted-accounting-principles-gaap-and-international.asp
https://www.businessinsider.com/heres-how-ifrs-is-different-than-us gaap -2015-2?IR=T/#ixzz5zSWsHfIy
Keywords: US GAAP, IFRS, accounting standards, revenue recognition, inventory valuation, depreciation, financial instruments, leases, income taxes, employee benefits, share-based payments, business combinations, consolidation.