US GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards)

We compare the account-level differences between US GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards) under the main headings. The two are the principal frameworks used for financial reporting worldwide, but they differ in certain accounts and accounting procedures. Here are some of the key differences:

1. Revenue recognition

• US GAAP: With ASC 606, revenue recognition rules have become largely aligned with IFRS 15. Previously there were specific rules for industries such as construction contracts and software sales.

• IFRS: IFRS 15 provides a single framework that unifies revenue recognition across all industries. Revenue is recognised as the performance obligations in the contract are satisfied. Limited differences remain between the two systems, however, in areas such as licences, contract costs and certain disclosures.

2. Inventories

• US GAAP: Inventories may be measured using FIFO (first in, first out), LIFO (last in, first out) or the weighted average cost method. Permitting LIFO is an important difference that sets US GAAP apart from international practice.

• IFRS: LIFO is not permitted. Only FIFO or the weighted average cost method may be used.

3. Financial instruments and investments

• US GAAP: There are rule-based classification categories for investments in debt securities (trading, available-for-sale, held-to-maturity).

• IFRS: Classification is based on principle-based criteria such as the entity's business model and the characteristics of the contractual cash flows.

4. Leasing

• US GAAP: Under ASC 842, lessees recognise almost all leases, including operating leases, on the balance sheet as a right-of-use asset and a lease liability. However, the distinction between operating and finance leases remains; for operating leases a single, straight-line lease cost is recognised in the income statement.

• IFRS: IFRS 16 provides a single model for lessees and requires all leases other than short-term and low-value leases to be recognised on the balance sheet. Depreciation and interest expense are presented separately in the income statement.

5. Impairment

• US GAAP: A two-step test is applied to long-lived assets held and used: first, it is tested whether the carrying amount is recoverable from undiscounted cash flows; if it is not, the impairment is measured by reference to fair value. An impairment loss cannot subsequently be reversed.

• IFRS: Under IAS 36, the carrying amount is compared with the "recoverable amount" (the higher of fair value less costs of disposal and value in use). For assets other than goodwill, an impairment loss may be reversed if circumstances change.

6. Research and development (R&D) costs

• US GAAP: Research and development costs are generally expensed.

• IFRS: Development costs may be capitalised as an asset if certain conditions are met, while research costs are still expensed.

7. Investment property and revaluation

• US GAAP: Revaluation of property, plant and equipment is not permitted. Investment property is also carried at cost and depreciated.

• IFRS: The revaluation model may be chosen for property, plant and equipment, and the fair value model for investment property.

8. Measurement of financial assets and liabilities

• US GAAP: There are detailed classification and measurement rules by type of instrument; for example, equity investments are generally measured at fair value through net income. Credit losses are calculated under the CECL model, based on lifetime expected losses from initial recognition.

• IFRS: Under IFRS 9, financial assets are classified as measured at amortised cost, at fair value through other comprehensive income or at fair value through profit or loss. Expected credit losses are calculated using a three-stage model.

9. Quarterly reporting

• US GAAP: In the United States, SEC-registered companies must publish quarterly financial reports (Form 10-Q); the principles of interim reporting are set out in ASC 270.

• IFRS: IAS 34 governs the content of interim reports but does not require them to be prepared. That requirement is determined by local regulation.

10. Balance sheet and income statement classification

• US GAAP: For SEC registrants, Regulation S-X sets specific presentation rules; balance sheet items are generally listed in order of decreasing liquidity.

• IFRS: IAS 1 does not impose a specific format but sets out minimum line items; classification can be determined according to the company's activities.

Both systems share the aim of ensuring that financial information is reliable and comparable, but they differ in certain accounts and reporting methods.