IFRS and GAAP: The Similarities and Differences

It is only a matter of time before the accounting profession is completely converged into one set of high-quality international standards. Over a decade now, there has been advancements in converging the U.S. generally accepted accounting principles with the International Financial Reporting Standards. As the two accounting standards continue to converge into a single set of international standards, one will realize that there are many similarities and differences between the methods. Although the differences may provoke a need for compromise, the similarities reveal that the convergence is an attainable goal.
Generally accepted accounting principles, or GAAP, are the common set of accounting standards in the U.S. GAAP, issued by the American Institute of Certified Public Accountants (AICPA), has been an ongoing development for the past 60 years; it includes the following items: Financial Accounting Standards Board (FASB) Standards, Interpretations, and Staff Positions; Accounting Principles Board (APB) Opinions; and AICPA Research Bulletins. Today, the Securities and Exchange Commission (SEC) oversees all U.S. accounting practices, making sure the accounting practices adhere to GAAP standards. GAAP establishes standards to make financial records relevant and reliable for all interested investors, stockholders, or other financial readers. So what about international companies? How do these companies develop financial information? International companies cannot just prepare their financial information under GAAP standards; they have to take the International Financial Standards rules into consideration as well.
The International Accounting Standards Board (IASB) in London developed the International Financial Reporting Standards (IFRS or iGAAP). Today, the European Union requires all companies in Europe to follow accounting practices under the IFRS method. Over 100 countries currently use IFRS. When the U.S. completely adopts IFRS, it will be easier to compare U.S. companies to foreign companies, and would therefore allow U.S. companies to raise capital in foreign markets.
GAAP and IFRS are alike in many ways, thus making the convergence a realizable task. The conceptual frameworks of both methods are very similar in structure, referring to their accounting objectives, elements, and qualitative characteristics. A major similarity between GAAP and IFRS is that both standards use an income statement, a balance sheet, and a statement of cash flows. When dealing with cash and cash equivalents, both methods are essentially the same. Another major similarity is that both GAAP and IFRS prepare financial statements on an accrued basis; meaning revenue is recognized when it is realized or realizable. There are many other similarities between GAAP and IFRS, and will therefore help in a complete convergence in the near future, but before there is one international financial accounting set of standards, the differences between GAAP and IFRS have to be taken into consideration.