How Does U.S. Accounting Differ From International Accounting?

Despite major efforts by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), significant differences remain between accounting practices in the United States and the rest of the world. International practices are compiled in the International Financial Reporting Standards (IFRS), as set by the IASB. In the U.S, the FASB releases statements of financial accounting that, when combined, form generally accepted accounting principles (GAAP).

Key Takeaways

• There are significant differences between GAAP (used in the U.S.) and international accounting standards.
• Companies in the U.S. can use the inventory-costing method called LIFO, while it is banned under international standards.
• GAAP doesn’t permit the revaluation of assets while IFRS does based on fair value.
• The FASB requires more financial documents to be filed compared to the IASB.

Inventory Accounting Differences

U.S. companies are allowed to use last in, first out (LIFO) as an inventory-costing method. However, LIFO is banned under a competing set of accounting standards used in much of the world.

Generally accepted accounting principles allow inventory carrying cost accounting, while the IFRS explicitly prohibits any company from using LIFO. Instead, international standards dictate that the same cost formula must be applied to all inventories of a similar nature.

Under GAAP, inventory is carried at the lower of cost or market, with the market being defined as the current replacement cost, with some exceptions. Inventory under IFRS is carried at the lower of cost or net realizable value, which is the estimated selling price minus costs of completion and other costs necessary to make a sale.

Other inventory differences include how markdowns are allowed under the retail inventory method (RIM), and how inventory write-downs are reversed.

Note

According to the American Institute of Certified Public Accountants, the greatest difference between the IFRS and GAAP is “that IFRS provides much less overall detail.” Other significant differences include how comparative financial information is presented, how the balance sheet and income statements are laid out, and how debts are treated.

Long-Lived Assets

Another key difference between the two accounting standards relates to the revaluation of assets:

• GAAP does not allow for assets to be revalued
• IFRS allows for some revaluation based on fair value, provided it is completed regularly.

The depreciation of the components of long-lived assets is very uncommon and (technically) allowable under GAAP. It is required under IFRS if the asset’s components have “differing patterns of benefit.”

Long-lived investment assets are defined separately by the IASB and are normally accounted for on a historical cost basis. In the U.S., the FASB does not have a separate definition for property used as an investment only. As such, property is only held for use or for sale.

Impairment losses for long-lived assets under GAAP are calculated as the amount of the asset exceeding fair value. Under IFRS, such assets are calculated as the amount an asset exceeds “recoverable amount,” or the higher figure between fair value less costs to sell or value in use.

Required Documents for Financial Accounts

Companies that adhere to GAAP and IFRS are also subject to different requirements for the documents that they must submit. For instance, companies that report under IFRS are required to compile and publish a balance sheet, income statement, changes in equity document, cash flow statement, and all associated footnotes. The FASB requires all of these financial documents in addition to statements that outline the reporting company’s comprehensive income.

What Is the Difference Between GAAP and IFRS?

Generally accepted accounting principles are considered to be rules-based. This means that GAAP rules are made for specific cases and do not necessarily represent a larger principle. International financial reporting standards, on the other hand, are principles-based. In that way, IFRS are considered to be more consistent.

Is GAAP Better Than IFRS?

There is no easy answer to this because it is a subjective opinion. Some business leaders may find that the rules-based GAAP approach is better while others may favor the principles-based IFRS standards. Although IFRS is an international standard (for more 168 countries), GAAP continues to be used in the United States.

Which Companies Are Required to Follow GAAP in the U.S.?

Generally accepted accounting principles are the standard used in the United States. These principles must be followed by public companies, government agencies, nonprofit organizations, and “organizations that receive federal funding awards from the U.S. government.” Although they may choose to, private U.S. companies are not obligated to follow GAAP.

The Bottom Line

Following accounting principles is a requirement for any public company that creates and issues public financial statements. GAAP and IFRS are two sets of standards—both with key differences between then. While IFRS has become the go-to accounting method for international companies, GAAP remains the standard in the United States.