IFRS are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade. The IFRS is particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards.

The IFRS began as an attempt to harmonize accounting across the European Union, but the value of harmonization quickly made the concept attractive around the world. They are occasionally called by the original name of International Accounting Standards (IAS). The IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On April 1, 2001, the new International Accounting Standards Board (IASB) took over the responsibility for setting International Accounting Standards from the IASC. During its first meeting, the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards the IFRS.

IFRS vs GAAP

A major difference between GAAP and IFRS is that GAAP is rule based, whereas IFRS is principle based.

A principle-based framework has the potential for different interpretations of similar transactions, which could lead to extensive disclosures in the financial statements. The standards-setting board in a principle-based system like IFRS can issue supplemental pronouncements to clarify unclear areas, just as the FASB does in the rule-based GAAP system.

Another difference between IFRS and GAAP is the methodology used to assess accounting treatment. Under GAAP, the research is more focused on the literature whereas, under IFRS, the review of the facts pattern is more thorough.

Some Examples of Differences between IFRS and GAAP

• Consolidation: IFRS favors a control model whereas GAAP prefers a risks-and-rewards model. Some entities consolidated in accordance with FIN 46(R) may have to be shown separately under IFRS.
• Statement of Income: Under IFRS, extraordinary items are not segregated in the income statement. With GAAP, they are shown below the net income.
• Inventory: Under IFRS, Last In, First Out (LIFO) cannot be used; whereas under GAAP, companies have the choice between LIFO and FIFO.
• Earning-per-Share: Under IFRS, the earnings-per-share calculation does not average the individual interim period calculations; whereas under GAAP the computation averages the individual interim period incremental shares.
• Development costs: These costs can be capitalized under IFRS if certain criteria are met, while it is considered as “expenses” under GAAP.

You may be asking yourself at this point, “What about having the world use the same standards?” There is a movement to do just that and we’ll cover it next.