IFRS VS. GAAP

A potential audit client recently came to us requesting a bid for an audit prepared under International Financial Reporting Standards (IFRS). This may be a first for us, but it definitely will not be the last. IFRS is taking the American audit community by storm.

Just the other day, as I was browsing audit reports online, I came across the Georgetown Chamber of Commerce report. Interestingly enough, the report complied with IFRS, not Generally Accepted Accounting Principles (GAAP). While IFRS has not yet become a requirement, it has certainly become a viable option for many organizations. So what, exactly, is the difference between IFRS and GAAP?

INTRODUCTION TO IFRS
The globalization of business and finance has led to mass adoption of IFRS in more than 110 countries. In the next three years, it is expected that 150 countries will mandate or allow IFRS. Canada, India, and Japan plan to adopt IFRS in 2011 with Mexico following suit in 2012. IFRS has the potential to enhance the quality of reporting and decrease the costs of preparing and interpreting financial statements.

DIFFERENCES BETWEEN IFRS AND GAAP

Revenue Recognition
With respect to revenue recognition, US GAAP is much more detailed and industry-specific. IFRS mentions just two main revenue standards along with a couple of interpretations related to revenue recognition as guidance.

Expense Recognition
There are also some significant differences with expense recognition in regards to when an expense should be recognized and the amount that should be recognized. IFRS recognizes the expense of certain stock options with vesting over a period of time sooner than GAAP.

Financial Instruments
Some significant differences exist in the area of financial liabilities and equity. While an instrument may be regarded as equity under GAAP, it may be considered as debt under IFRS.

Consolidation
GAAP has several criteria for consolidation while IFRS allows consolidation based on the power exercised by the company on the financial operational policies of the other entity.

Inventory Methodology
GAAP offers companies the option of using the last in, first out (LIFO) inventory methodology whereas IFRS forbids this type of inventory costing.

The above are just a few of the major differences and possible changes when converting to IFRS. For more information on IFRS requirements and transitioning to IFRS reporting, check out pcaobus.org or contact our office.