As an accountant, understanding the differences between GAAP and IFRS is crucial. Most accounting treatments within both frameworks match. However, some areas require companies to treat items differently. While these differences may seem minor, they can impact the financial statements substantially. While accountants may understand those impacts, most stakeholders may not know them.
While most stakeholders can expect IFRS, US companies still prefer GAAP. Sometimes, they may not have a choice but to report their financial statements under the GAAP. As more companies are going global, this difference is becoming a prominent issue. IFRS helps companies with a broader reach and understandability. However, GAAP is still the prevalent accounting framework for companies within the US.
Preferring GAAP over IFRS can have its advantages. However, it also creates several issues for companies in the global market. While there is no agreement on which is better, IFRS can provide more advantages. For companies expanding to the US, IFRS remains the primary accounting framework. However, companies from the US trying to grow outside may face issues.
The above scenarios magnify the issues faced by US companies in their preference for GAAP. Most of these issues would not exist if they used IFRS instead. However, that may not be possible in various cases. However, the question of whether US companies can use IFRS remains. Before discussing that, though, it is crucial to understand the different accounting frameworks.
What is the IFRS (International Financial Reporting Standards)?
The term IFRS represents the International Financial Reporting Standards. It refers to a set of accounting rules and procedures for preparing financial statements. Usually, these rules apply to public companies. However, other companies may also adopt them voluntarily. On top of that, a country’s legislation may dictate what entities must use the IFRS in financial reporting. Nonetheless, IFRS applies the same to all entities with minor changes.
IFRS includes various accounting standards that dictate the financial reporting process. It starts applying when companies record a financial transaction. From there, IFRS dictates the whole process until companies report that transaction in the financial statements. IFRS helps companies present their finances consistently with other companies. More importantly, it requires them to identify relevant information to report their finances.
IFRS applies to companies in over 166 jurisdictions. In some areas, a modified version of IFRS may apply. It is to conform to the local laws and regulations. Since it covers a significant area worldwide, IFRS is the preferred accounting framework for multinational companies. These companies can use the same standards to report their finances in several jurisdictions. However, it may not apply to the US.
IFRS comes from the International Accounting Standards Board (IASB). Previously, the International Accounting Standards Committee (IASC) dictated the process. The accounting standards coming from the former body came under IAS. After the change, the Board changed its name to IFRS. The former accounting standards are still relevant to companies. Nonetheless, new ones developed by the Board come under the IFRS name.
Overall, IFRS dictates companies in their financial reporting process. The standards bring consistency to the financial reporting process. Similarly, it helps promote comparability. When companies across the globe use these standards, those factors are crucial for financial reporting. One of the most prominent achievements of the IFRS was its adoption by EU countries. However, it hasn’t achieved the same in the US, where GAAP is prevalent.
What is the GAAP (Generally Accepted Accounting Principles)?
The term GAAP refers to the Generally Accepted Accounting Principles. It is the accounting framework that public companies in the US follow. Like the IFRS, other companies can also adopt it. However, public companies must follow GAAP in financial reporting. GAAP presents a more rule-based approach to accounting, which some jurisdictions may prefer. On the other hand, IFRS is more principle-based.
The difference between GAAP and IFRS can be more significant in some areas. Nonetheless, they are both essentially the same. GAAP includes various rules that dictate the financial reporting process. Like IFRS, these rules apply from recording transactions to ultimately reporting them. Similarly, GAAP also focuses on consistency. Unlike IFRS, though, GAAP only applies this consistency within the US.
GAAP primarily applies to companies in the US. Some companies outside the US may also use GAAP to cater to a US-based audience. Similar to IFRS, other jurisdictions may also use a modified version of the US GAAP standards. In the UK, the UK GAAP framework has become more prevalent. Though, these standards do not apply to public companies. Outside those jurisdictions, GAAP has no scope.
GAAP primarily comes from the Financial Accounting Standards Board (FASB). This Board dictates the financial reporting process for public companies. However, the same does not apply to other entities. For example, the Governmental Accounting Standard Board (GASB) dictates the process for government entities. These standards also follow some underlying accounting principles. Some of those principles also apply to the IFRS.
Overall, GAAP dictates the financial reporting process in the US. It also aims to introduce consistency to this process. On top of that, it also promotes comparability. However, comparison only applies to companies within the US. Users cannot compare financial statements prepared under GAAP with IFRS. While the world has leaned towards the IFRS, the US has been inflexible with the GAAP.
Can US Companies Use IFRS 2022?
The above discussions for IFRS and GAAP make one thing clear. The US does not want to embrace the IFRS standards. Although the US had several chances to change to the IFRS, it has stopped short of adopting it for its financial reporting. However, both have been converging toward similar standards in accounting. On top of that, the IFRS and GAAP use similar accounting principles.
If IFRS and GAAP are similar, many people wonder if US companies can use IFRS. The answer to that question is more complex than what is on the surface. Companies within the US can report their finances under both frameworks. However, some companies must use GAAP in their accounting process. Usually, these rules apply to public companies in the US.
Primarily, domestic public companies in the US must use GAAP. These companies can also report their finances under IFRS. However, those companies don’t need to do so. Instead, they may choose IFRS as a voluntary accounting standard. That does not imply they must not report their activities under GAAP. Using IFRS is optional, but GAAP is mandatory for these companies.
Some foreign companies also register with the US Securities and Exchange Commission (SEC). For these companies, using IFRS for SEC filings is permitted. It implies that foreign SEC registrants can ignore the GAAP rule for domestic public companies. These companies can still use the GAAP for their filings. However, the SEC does not require them to do so.
Small and medium entities in the US can use the IFRS for SMEs Standard. However, no rules or laws expressly permit doing so. Nonetheless, they do not prohibit using IFRS for SMEs either. On top of that, a specified financial reporting framework has not been adopted for most SMEs. Overall, SMEs within the US can use IFRS. However, they must check with their local government first.
Does IFRS Apply in the US?
The above discussion helps clarify how the IFRS applies in the US. For further information, the IFRS Foundation provides a helpful table. The below table summarizes the use of IFRS for different entities in the US.
IFRS has become one of the most prominent accounting frameworks globally. However, the US has been persistent with using the US GAAP standards. The former is principle-based, while the latter focuses on a rules-based approach. Within the US, companies can use the IFRS. However, domestic public companies must report their finances under GAAP.