When consistent benchmarks are in place—such as profitability, liquidity, and asset quality—comparing businesses becomes much more straightforward. Similarly, universally recognized business standards allow investors, lenders, and creditors to evaluate the health and performance of different organizations, even if they operate in distinct industries or regions.
Governments worldwide have adopted common reporting standards to help facilitate these comparisons, the most notable being Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). This article will detail these two rule sets, highlighting how and where they differ.
What is IFRS?
Created by the non-profit, non-government International Accounting Standards Board (IASB), IFRS represents a set of accounting guidelines intended to standardize financial reporting across international borders. These rules help organizations consistently document and report their economic activities, making it easier for investors, creditors, and other stakeholders to compare financial information. And while IFRS does not hold legal authority, almost every national government mandates its use in some form.
What is GAAP?
Maintained by the Financial Accounting Standards Board (FASB)—another non-profit, non-government agency — GAAP, or sometimes U.S. GAAP, is an alternate accounting rule set explicitly targeted at companies within the United States. However, some international businesses, particularly those that do a great deal of business within the U.S., also conform to these guidelines for at least some financial reporting.
Top 10 IFRS vs. GAAP differences
Admittedly, there are far more similarities between GAAP and IFRS accounting than variances. Both build off of an accrual accounting approach, recognizing revenue when it is earned rather than received. Both require similar core financial statements, including the balance sheet, income statement, and cash flow statement. Ultimately, both guidelines have the same focus — creating a standard, normalized framework for financial reporting.
In fact, both governing bodies have taken measures in recent years to align the operative functions of these distinct rule sets. However, several clear distinctions remain between them.
1. Coverage
The most significant difference between IFRS and GAAP is where and when these rules apply. As previously stated, GAAP guidelines are focused on organizations operating within the U.S. and are mandated by the U.S. Securities and Exchange Commission (SEC) or other government offices for:
- Publicly traded companies (regardless of where they are headquartered)
- Non-profit organizations
- All state and many local government agencies
Conversely, IFRS is more broadly accepted, with 147 countries mandating compliance with the standard for any publicly traded business or financial institution. An additional 14 nations have some mixture of mandated or voluntary compliance. Presently, IFRS affects every member nation of the European Union and the G20, along with Canada, Australia, and the majority of Asia, Africa, Central America, and South America.
2. Approach
Another variance is the specificity of the established guidelines. GAAP follows a more rules-based approach, offering precise details and setting distinct behavior thresholds. This approach leaves little room for interpretation.
IFRS follows a principles-based approach, which leaves some of the logistical elements or reporting to the discretion of the individual business. Rather than establishing clearly identified processes, these standards describe how reporting should be approached. As a result, IFRS documents tend to include more frequent and lengthier disclosures to clarify the decision-making process or nuance associated with a particular result.
3. Revenue
While both standards use accrual accounting, the specific timing of when revenue is recognized for a given sale diverges between the two. Within IFRS, revenue is recognized when the seller reasonably expects value, which can occur prior to delivery if there is a high probability that the customer will pay for the good or service. However, under GAAP, revenue is recognized once the sales process is fully completed and the buyer has assumed both the risks and rewards of ownership. Further, GAAP includes a variety of industry-specific rule sets that can affect recognition timelines further.
4. Inventory
GAAP and IFRS permit either the weighted average cost or the first in, first out (FIFO) approach to inventory accounting. However, they differ in their acceptance of the last in, first out (LIFO) method — with GAAP authorizing it and IFRS rejecting it. In particular, the IASB contends that LIFO is less accurate and may not convey honest, real-world inventory levels.
At the same time, GAAP forbids inventory write-down reversals. So, a business lowers the ascribed value of its inventory to match a market downturn. In that case, it cannot subsequently increase this figure if the market value for the inventory later improves. Meanwhile, IFRS allows these rollbacks under certain conditions.
5. Revaluation
Markets are constantly in flux, so the corresponding real-world value of most assets will vary daily. Much like its approach to inventory, IFRS offers the ability to reassess the fair market value of multiple asset types — rental leases, intellectual property, investments in marketable securities, and hard assets (property, plant, and equipment) — assuming that the fair value for these items can be reliably assessed. GAAP, however, is much more restrictive, only authorizing revaluation for marketable securities and instead relying on depreciation to account for the value difference tied to other asset types.
6. Research and development
Under GAAP, costs associated with the research and development of intangible assets or intellectual property — excluding software — are recorded as expenses when the corresponding charge occurs. For software, if it’s intended for internal use, GAAP only requires capitalization during the development stage. However, if the application is to be marketed and sold externally, costs should be recorded once a minimum viable product has been created.
With IFRS, the capitalization guidelines for development costs are looser. They require that a given value or viability threshold be met before attribution.
7. Investment income
The two standards also vary in how and where interest and dividends appear on a typical cash flow statement. While GAAP requires that interest—both paid and received—be listed as operating activities, IFRS offers more options. As such, paid interest can be recorded in either the operating or financing section of the cash flow statement and received interest can be placed in the operating or investing sections.
Similarly, GAAP mandates that paid dividends be reported in the financing section and received dividends in the operating section. In contrast, IFRS permits companies to categorize dividends as either operating or financing for those paid and as operating or investing for those received.
8. Leases
GAAP establishes separate accounting categories for operating leases and finance leases. Operating leases are recorded as a straight-line total lease expense. In contrast, finance leases are marked on income statements as both depreciation of the right-of-use asset and interest on the lease liability. IFRS, in turn, does not recognize this distinction, handling all leases under a reporting model similar to the GAAP standard for finance leases.
In addition, the IFRS lease accounting rules cover leases tied to intangible assets. However, GAAP excludes these types of financial relationships from its lease reporting standards.
9. Document layout
While records for either accounting standard predominantly contain the same information, how that data is organized varies considerably across rule sets. For instance, IFRS requires that for a statement of comprehensive income, the document combines all income and expenses under a common category. In contrast, GAAP allows the creation of subcategories to segment this information. So, under GAAP, liabilities are broken into current and non-current lists — or those that will be paid back in less than 12 months and those that will take longer.
10. Segment reporting
When reporting on the financial performance of a company’s internal divisions, subsidiaries, or other business segments, IFRS requires that this data be aligned with the internal management structures — precisely how the business is viewed and evaluated by its chief operating decision-maker (CODM). While GAAP bears this exact requirement to break out data per reporting structure, it does not require that every segment be represented. Instead, only those reaching a certain quantitative threshold — delivering 10% of total revenues, 10% of total profits, or 10% of total assets —need to be called out.
How automating accounts receivable helps your business meet compliance standards
While we’ve primarily focused on the reporting aspect of GAAP and IFRS in this article, maintaining compliance with either set of standards requires a healthy amount of work beyond document prep. In particular, you’ll want to ensure that the actual processes you’re reporting on — accounts receivable (A/R), accounts payable (A/P), and everything in between — are finely tuned and efficient. Automating your A/R can help with that.
In particular, the right technology — like our Accounts Receivable Automation platform — allows you to centralize and consolidate process workflows, eliminating unnecessary wait times and accelerating revenue recognition. With a solution that offers broad integration capabilities, you can eliminate the need for manual transcription or data processing, encouraging more timely, consistently accurate records. You can leverage this improved insight to manage your cash flow and associated liquidity risks effectively.
Further, these automation platforms are commonly bundled with some form of pre-built reporting function that can help simplify the documentation and auditing portion of your compliance efforts. More advanced platforms will likely offer features similar to our Advanced Reporting add-on, allowing you to quickly and easily generate custom financial documents based on hundreds of objects and field types.
Invoiced: The new standard in A/R automation
Of course, accounting automation can deliver several benefits beyond those strictly tied to compliance. Our Accounts Receivable Automation platform can streamline and simplify the most complicated of billing processes, readily accommodating subscriptions, disputes, discounts, credits, and more. Our integrated Smart Chasing feature can formalize and automate your dunning efforts, helping you get paid more quickly and reducing the potential for bad debt.
As previously mentioned, our software is ideally suited for working with GAAP or IFRS. In fact, we recently enhanced it to leverage Flywire’s global payment capabilities, making it easier to conduct business in over 140 currencies—almost anywhere IFRS is active.
Schedule a demo today to see how you could simplify compliance, streamline productivity, and accelerate your payment cycle!
