The U.S. Generally Accepted Accounting Principles (GAAP) and the International Accounting Standards (IAS) -- also known as the International Financial Reporting Standards (IFRS) -- both serve the same purpose. GAAP and IAS provide a framework of accounting principles that can be used to draft financial statements. GAAP is used within the United States, while IAS has been adopted by many other developed nations. While the organizations that define GAAP and the IAS seek to converge the two standards, there are some significant differences between them. The U.S. Securities and Exchange Commission has found 29 specific areas of difference in application between GAAP and IFRS. However, the broad points of comparison concern the way in which the two frameworks are structured, how financial statements are presented, the definitions of assets and liabilities, and revenue recognition.
Framework Structure
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A key difference between GAAP and IAS is uniformity. While GAAP does provide a general standard, many times it will also create exceptions, while offering more specific guidance targeted towards specific industries. These allowances are made in recognition of the peculiarities of the different business models in an effort to prevent abuse or provide more detailed information about specific types of transactions. Application of GAAP by businesses is generally consistent within industries, but is less consistent when comparing practices of different industries. In comparison, the IFRS establishes general principles and does not make exceptions for industries or specific situations.
Financial Statements
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There are many similarities in preparing financial statements under GAAP and IFRS. Both frameworks define complete financial statements as a balance sheet, income statement, statement of cash flows, statement of comprehensive income and footnotes. Both prohibit businesses from recognizing revenue prior to being earned and expenses prior to being accrued. Both have similar ideas about what makes a financial event “material” and each places similar importance on maintaining consistency of accounting standards from year to year. There are some very narrow differences regarding statement preparation, such as how the income statement and balance sheet are presented.
Definition and Recognition of Assets and Liabilities
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Under GAAP, assets and liabilities are defined in terms of “probability;” an asset or liability is something that represents a probable future economic benefit or loss. GAAP defines probability as something that can be reasonably expected based on the circ*mstances. IFRS also uses probability to determine when an asset or liability should be added to a business’s balance sheet, but does not define what constitutes “probable.” The IFRS also requires that before an asset or liability can be recognized, the item’s value must be reliably measurable.
Revenue Recognition
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Both GAAP and IFRS recognize revenue based on whether the process that generates the income is completed. If you enter into a contract to provide a product in exchange for a good, under GAAP and IFRS you cannot record income from that sale until you deliver the item. However, there are some differences in revenue recognition principles due to the differences in structure. GAAP provides more specific guidance to recognize revenue in certain situations, while IFRS only provides general standards. Therefore, there may be differences in specific business revenue recognition polices due to the degree of specificity provided by GAAP in comparison to the general standard provided by IFRS.
