IFRS vs US GAAP

Beyond the ordinary

Core differences

1. Framework Approach

• IFRS: Principles-based, allowing judgment.
• US GAAP: Rule-based, with detailed rules.
• Example: Lease classification under IFRS considers the substance of the lease; US GAAP has specific criteria for capital vs. operating leases.

2. Revenue Recognition

• IFRS (IFRS 15): Recognize revenue when control passes, following a five-step model.
• US GAAP (ASC 606): Similar model but with more industry-specific guidance.
• Example: Construction companies may recognize revenue at different stages; IFRS emphasizes transfer of control, US GAAP may rely on percentage-of-completion criteria.

3. Inventory Valuation

• IFRS: LIFO prohibited.
• US GAAP: LIFO permitted.
• Example: During inflation, US companies using LIFO report lower taxable income; IFRS companies must use FIFO or weighted average.

4. Asset Impairment

• IFRS: One-step test comparing carrying amount to recoverable amount.
• US GAAP: Two-step impairment test—first identify impairment, then measure loss.
• Example: Impairment losses for machinery are recognized faster under IFRS due to the one-step approach.

5. Financial Instruments

• IFRS (IFRS 9): Classifies assets based on business model and cash flow; fair value through profit or loss (FVTPL).
• US GAAP: Multiple complex classifications with specific criteria.
• Example: Debt instruments may be classified as amortized cost or fair value, depending on the entity’s intent, leading to different measurement approaches.