International Financial Reporting Standards, or IFRS, are a set of accounting standards for formal financial reporting set forth by the International Accounting Standards Board, called the IASB. In the United States, most companies report under U.S. Generally Accepted Accounting Principles, or GAAP, the standards for which are primarily promulgated by the Financial Accounting Standards Board, known as the FASB. There are some significant differences between accounting standards under IFRS and under U.S. GAAP.
U.S. GAAP contains a significant body of detailed rules that govern the recognition of revenue. The rules are often industry specific, and often extend to the discussions on particular transactions and to whether certain events trigger the recognition of revenue from a transaction or not.
IFRS does not have this same detailed level of rules and, instead, adopts a principles based approached, creating broad standards for interpretation. In determining revenue recognition, IFRS focuses primarily on the likelihood that a transaction will result in an economic benefit for the reporting entity.
Under U.S. GAAP, financial reporting entities can choose from a variety of inventory costing and valuation methods, usually including the popular "First in, First out," "Last in, First out" or weighted average cost methods. In a significant departure from U.S. GAAP, IFRS forbids the use of Last in, First out inventory accounting. In addition, while both U.S. GAAP and IFRS require inventory impairment testing, only IFRS requires the reversal of the impairment charges when the criteria creating the impairment are removed.
Another significant area where U.S. GAAP and IFRS substantially differ is in accounting for leases. Under U.S. GAAP, most lease transactions are not recorded as balance sheet assets, and liabilities and transactions only affect the entity's income statement. Under IFRS, however, a significantly greater number of lease transactions are accounted for as finance leases, for which the reporting entity must recognize both an asset and the future lease liability.
Financial Statement Presentation
U.S. GAAP and IFRS differ not only in the method of the underlying reporting principles, but also in the manner in which the financial statements are presented. While both U.S. GAAP and IFRS typically require a balance sheet, income statement, statement of changes in equity, statement of cash flows and financial statement footnotes, the titles of the statements vary. In addition, the classification of items in cash flows, such as interest, dividends, taxes and bank overdrafts, often vary greatly. Finally, the required footnote disclosures can be substantially different between the two methods.