The standards that govern financial reporting and accounting vary from country to country. In the United States, financial reporting practices are set forth by the Financial Accounting Standards Board (FASB), and organized within the framework of the generally accepted accounting principles (GAAP). More than 100 countries around the world have adopted the international financial reporting standards (IFRS), which aim to establish a common global language for company accounting affairs. While the Securities and Exchange Commission (SEC), has openly expressed a desire to switch from GAAP to IFRS, development has been slow.
Some accountants consider methodology to be the primary difference between the two systems; GAAP is rules-based and IFRS is principles-based. This disconnect manifests itself in specific details and interpretations. Basically, IFRS guidelines provide much less overall detail than GAAP. Consequently, the theoretical framework and principles of the IFRS leave more room for interpretation and may often require lengthy disclosures on financial statements. On the other hand, the consistent and intuitive principles of IFRS are more logically sound and may possibly better represent the economics of business transactions.
Perhaps the most notable specific difference between GAAP and IFRS involves their treatment of inventory. IFRS rules ban the use of last-in, first-out (LIFO), inventory accounting methods. GAAP rules allow for LIFO. Both systems allow for the first-in, first-out method (FIFO,) and the weighted average-cost method. GAAP does not allow for inventory reversals, while IFRS permits them under certain conditions.
Another key reporting difference is that GAAP requires financial statements to include a statement of comprehensive income. IFRS does not consider comprehensive income to be a major element of performance and therefore does not require it. This leaves some room for mixing owner and non-owner activity within the financial statements.