IFRS vs US GAAP: Key Differences Explained

Why the Differences Still Matter

Despite decades of convergence efforts, International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (US GAAP) remain distinct frameworks with meaningful differences. For finance professionals working at multinational organizations, preparing dual-GAAP reporting packages, or evaluating cross-border acquisitions, understanding these differences is essential to producing accurate financial statements and making informed decisions.

This article focuses on the differences that have the greatest day-to-day impact on financial reporting teams. Rather than cataloging every technical divergence, we will concentrate on the areas where the wrong assumption can lead to material misstatement.

Foundational Philosophy

Before examining specific topics, it helps to understand the philosophical divide:

• US GAAP is rules-based. It provides detailed, prescriptive guidance for a wide range of transactions. When a specific rule exists, you follow it.
• IFRS is principles-based. It establishes broad principles and expects preparers to apply professional judgment to the specific facts and circumstances.

This distinction has real consequences. US GAAP often provides a bright-line test (e.g., a 75% lease term threshold under legacy standards), while IFRS relies on qualitative assessments. Neither approach is inherently superior, but switching between them requires a shift in mindset.

Revenue Recognition

The good news: ASC 606 (US GAAP) and IFRS 15 are substantially converged. Both follow the same five-step model. However, several differences remain:

• Licensing – The guidance on determining whether a license is “right to use” versus “right to access” is more detailed under ASC 606, with specific implementation guidance for intellectual property licenses.
• Interim reporting of variable consideration – Under IFRS 15, interim periods are discrete periods. Under US GAAP, quarterly reporting follows ASC 270, which can affect the timing of variable consideration estimates.
• Contract cost capitalization thresholds – While both frameworks require capitalizing incremental costs of obtaining a contract, the practical expedient for contracts with an amortization period of one year or less is applied slightly differently in practice.

Practical Tip

If your organization reports under both frameworks, build a reconciliation schedule that isolates revenue timing differences. In most cases, the differences are small, but they compound when you have high transaction volume.

Lease Accounting

This is one of the most significant areas of divergence.

Why It Matters

The single-model approach under IFRS 16 means that EBITDA is higher for companies reporting under IFRS (because lease expense is replaced by depreciation and interest, both of which are excluded from EBITDA). This has a direct impact on covenant calculations, valuation multiples, and compensation metrics tied to EBITDA.

Inventory

• Cost formulas – US GAAP permits LIFO (last-in, first-out); IFRS prohibits it. This is one of the most well-known differences and has significant tax implications for US companies that use LIFO.
• Write-downs – Under US GAAP, inventory write-downs to net realizable value are permanent (no reversal). Under IFRS, write-downs can be reversed if the circumstances that caused the write-down no longer exist.
• Cost determination – Both frameworks allow FIFO and weighted average cost. The practical impact of the LIFO prohibition is most acute for companies in industries with rising input costs (e.g., manufacturing, retail).

Impairment of Long-Lived Assets

Goodwill Impairment

Other Long-Lived Assets

Under US GAAP, a two-step process applies: first, a recoverability test (undiscounted cash flows), then a fair value measurement if the asset fails. Under IFRS, there is a single step: compare the carrying amount to the recoverable amount (which uses discounted cash flows for value in use). Importantly, IFRS allows reversal of impairment losses on assets other than goodwill; US GAAP does not.

Financial Instruments

This area has seen significant convergence but important differences persist:

• Impairment model – US GAAP (ASC 326, CECL) requires a current expected credit loss model that considers lifetime expected losses from Day 1. IFRS 9 uses a three-stage model where lifetime losses are recognized only when credit risk has increased significantly.
• Classification – IFRS 9 uses a business model and contractual cash flow characteristics approach. US GAAP has separate guidance for debt securities (ASC 320) and loans (ASC 310).
• Hedge accounting – IFRS 9 provides a more principles-based approach to hedge accounting with fewer bright-line effectiveness tests, making it easier to qualify for hedge accounting in many cases.

Development Costs

This is a frequently overlooked difference:

• US GAAP – Research and development costs are expensed as incurred (with narrow exceptions for software development costs under ASC 985-20 and internal-use software under ASC 350-40).
• IFRS – Research costs are expensed, but development costs must be capitalized when six specific criteria are met (technical feasibility, intention to complete, ability to use or sell, probable future economic benefits, availability of resources, and ability to measure costs reliably).

Impact on Comparability

Companies reporting under IFRS may show higher assets and lower expenses during periods of heavy development spending. When comparing an IFRS reporter to a US GAAP reporter, adjust for capitalized development costs to get an apples-to-apples view of operating performance.

Presentation and Disclosure

• Income statement – IFRS does not define “operating income,” though most companies present it. US GAAP requires specific line items and subtotals.
• Extraordinary items – Prohibited under both frameworks (IFRS eliminated them years ago; US GAAP followed in 2015).
• Balance sheet classification – IFRS classifies liabilities as current or non-current based on the entity’s right to defer settlement at the reporting date. Recent amendments under IAS 1 have added nuance around covenants and settlement expectations.

A Practical Framework for Managing Dual-GAAP Reporting

If your organization reports under both frameworks, consider these steps:

1. Maintain a living differences register – Document every known difference between the two frameworks as it applies to your specific transactions.
2. Design your chart of accounts to capture both treatments – Use sub-accounts or tracking dimensions to record IFRS adjustments without disrupting the US GAAP ledger.
3. Automate reconciliation – Build systematic reconciliation templates that bridge from one framework to the other, ideally integrated into your close process.
4. Train your team on both frameworks – Cross-training reduces key-person risk and improves the quality of judgment calls.
5. Engage auditors early – When entering into new types of transactions, get input from both your US GAAP and IFRS audit teams before finalizing the accounting treatment.

Final Thoughts

The differences between IFRS and US GAAP are narrowing, but they have not disappeared. For finance professionals, the most important skill is not memorizing every difference but knowing where the differences exist and having a reliable process for identifying and resolving them when they arise. A well-maintained differences register and a disciplined close process will serve you far better than any summary table.