Financial Accounting: In an Economic Context

INTERNATIONAL PERSPECTIVE: FUNDAMENTAL DIFFERENCES BETWEEN U.S. GAAP AND IFRS

The assumptions, principles, and exceptions discussed in this chapter that form the basis for U.S. GAAP also underlie IFRS. Economic entity, objectivity, matching, revenue recognition, consistency, and conservatism, as well as the others, are all important in the preparation of IFRS-based financial reports, and the overlap between the two systems is much greater than the departures. However, some important differences do exist, and they tend to result from differences in how these concepts are applied to individual situations.

U.S. GAAP and IFRS differ in two fundamental ways. First, IFRS is more “principles-based” while U.S. GAAP tends to be more “rules-based.” U.S. GAAP is characterized by more “bright line” rules. Under U.S. GAAP, for example, there are different rules for revenue recognition for different industries, while IFRS tends to rely on a single basic revenue recognition standard. Similarly, accounting for leases under U.S. GAAP contains specific criteria for the recognition of assets and liabilities; under IFRS, the lease standard is much more general and open-ended. This basic difference leads to greater levels of required disclosure under U.S. GAAP, and most managers would agree that it is more difficult and costly to comply with the reporting requirements under U.S. GAAP. IFRS, on the other hand, generally leaves more discretion to management when choosing how to account for transactions, ...