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GAAP vs. IFRS

GAAP (Generally Accepted Accounting Principles) is the accounting standard used in the United States, while IFRS (International Financial Reporting Standards) is the accounting standard used in over 110 countries around the world. GAAP is considered a more “rules based” system of accounting, while IFRS is more “principles based”.

The Securities and Exchange Commission’s (SEC) goals and efforts both domestically and internationally have been to consistently pursue the achievement of fair, liquid, and efficient capital markets. Doing this provides investors with information that is accurate, timely, comparable, and reliable. One of the ways the SEC has pursued these goals is by upholding the domestic quality of financial reporting as well as encouraging the convergence of the U.S. and IFRS standards.

The aim is that by the time the SEC allows or mandates the use of IFRS for U.S. publicly traded companies, most or all of the key differences will have been resolved. Because of these ongoing convergence projects, the extent of specific differences between IFRS and U.S. GAAP are shrinking. However, key differences remaining include:

IFRS does not permit Last In First Out (LIFO) as an inventory costing method.

IFRS uses a single-step method for impairment write-downs rather than the two-step method used in U.S. GAAP; making write-downs more likely.

IFRS has a different probability threshold and measurement objective for contingencies.

IFRS guidance regarding revenue recognition is less extensive than GAAP and contains relatively little industry-specific instruction.

In its strategic document, the Strategic Plan for Fiscal Years 2014–2018, the SEC mentions that it is willing to consider the idea of a single set of global accounting standards. However, it never mentions IFRS. Although full adoption of IFRS in the United States continues to face long odds, understanding IFRS remains extremely important for investors and U.S. companies.