The Differences Between the GAAP and the IFRS Accounting Systems

In the United States, Generally Accepted Accounting Principles (GAAP) are a set of “rules that encompass the detail, complexities, and legalities of business and corporate accounting”1. In short, organizations use GAAP to provide users with financial statements and documents that provide consistent practices and reporting standards. To combat confusion between different reporting standards and accounting practices, the International Accounting Standards Board (IASB) has created International Financial Reporting Standards (IFRS) with the goal of “becoming the global standard for the preparation of public company financial statements”2. The implementation of a single set of standards internationally would provide users and credit providers a more informative and understandable set of financial statement. As such, the shift of more companies moving towards accounting standards that are more cohesive on an international scale would be beneficial for internal and external parties.

One major difference between IFRS and GAAP is their treatment of intangibles assets, such as goodwill and patents. Under IFRS, intangible assets will only be recognized if they will “have a future economic benefit”3. By recognizing the asset in this way, the asset can be assessed and given a monetary value once the benefit is recognized. Under GAAP, the intangible asset is recognized at current fair market value with no additional considerations made at that time. While this way makes sense for the organization at that point, intangible asset value may fluctuate over time and the adjusting entries will need to be made to reflect the change.

This conflicts with my previous understanding of accounting because there needs to be a recognition of goodwill when acquiring a company that is worth less than what was paid, indicating goodwill. Goodwill does not generate future economic benefits for the organization so under IFRS, the parent must “assess the goodwill together with other related net assets for impairment testing purposes”4. Because of this, goodwill will be treated differently under IFRS compared to GAAP.

Another difference between IFRS and GAAP would be the treatment of inventory costing. GAAP companies use Last-In First-Out (LIFO), First-In First-Out (FIFO), and weighted-average primarily. The inventory valuation system of LIFO cannot be used under IFRS, so the inventory systems of FIFO and weighted-average costing are used instead5. LIFO is prohibited from being used under IFRS due to potential distortions on financial statements such as understating earnings, resulting in “outdated and obsolete inventory numbers”6.

The IFRS treatment of inventory systems, specifically LIFO, conflicts with my previous understanding of accounting principles because LIFO is a commonly used inventory system within the United States and has been taught in classes. Thus far, I was unaware that LIFO would negatively influence financial statements to the extent international standards boards would prohibit the use. A reconciliation or transition of the inventory system as a whole would need to occur for a company under GAAP using LIFO to prepare financial statements under IFRS.

There are more differences that I expected between GAAP and IFRS, but this is attributable to the differences in the standards between the two. I believe that having international financial reporting standards would improve financial understanding for users who are not based in the country of origin and those who need to review the financial statements of multinational companies. Having a comprehensive list of standards for an international company and the reconciliation, if applicable, would provide internal and external users with better quality information to make decisions. In a world that is becoming more interconnected and readily accessible, financial reporting and accounting as whole needs to be updated.