In the world of accounting, there are many rules that a firm must follow regarding how they may report different items on their financial statements. Along with that, there are two main sets of rules to follow: GAAP and IRFS. GAAP is known as the Generally Accepted Accounting Principles and IFRS, the International Financial Reporting Standards. While many of the rules are the same between the two reporting systems, there are also a number of differences.

One difference between US GAAP and IFRS is the recording of impairment for property, plant, and equipment. Under US GAAP, a two-step impairment test is used. First, book value is compared to the undiscounted future cash flows of the asset. If the book value is less, then no impairment has occurred. However, if the book value is greater than the undiscounted future cash flows, an impairment has occurred and you move onto step two of the impairment test. In step two, compare the carrying amount to the fair market value of the asset. The amount of impairment is equal to the amount that the book value is greater than the fair market value. Under US GAAP, the reversal of an impairment is prohibited (“IFRS and US GAAP,” 2014).

IFRS uses only a one-step impairment test for property, plant, and equipment. In this case, the book value of an asset is compared to the recoverable amount, where the recoverable amount is the greater of the fair market value of the asset less the costs of disposal or the asset’s value in use (“IFRS and US GAAP,” 2014). Like US GAAP, the amount of impairment is equal to the amount by which the book value exceeds the recoverable amount. However, unlike US GAAP, IFRS allows the reversal of impairments. This can have a large impact on a firm’s financial reporting. When an asset is marked down from an impairment, it is recorded as a loss on the income statement. Under IFRS, however, if the asset then increases in value, it may be marked back up and recorded as a gain up until the initial cost (Dumont, 2012).

A second difference between IFRS and US GAAP also relates to property, plant, and equipment. Under US GAAP, assets characterized as PPE are recorded at historical cost. These assets are not allowed to be recognized and recorded at their fair market value. On the other hand, IFRS allows the option to record PPE assets at either historical cost or fair market value. This difference can also result in significant differences on financial statements.

Another difference between US GAAP and IFRS is the way in which research and development costs for internally generated intangibles are recorded. Under US GAAP, all costs incurred in the creation of an internally generated intangible are expensed. Few exceptions to that include the costs associated with computer software created for internal use or with the intention to be sold and web site development (“Goodwill,” n.d.). On the other hand, under IFRS, costs associated with the creation of intangibles are separated into two categories: research costs and development costs. The research costs are always expensed, while development costs may be capitalized only if certain criteria are met such as “The intention to complete the intangible asset” and “How the intangible asset will generate probable future economic benefits” (“IFRS and US GAAP,” 2014).

Finally, the inventory costs accounting method is a fourth difference between the two sets of guidance. While FIFO, LIFO, weighted average, and specific identification are permitted under US GAAP, LIFO is specifically not allowed under IFRS. Because of this, firms using LIFO must convert and disclose their inventory into FIFO terms for financial reporting, also known as the LIFO reserve. The difference of choice between inventory costing will have an effect on the cost of goods sold and following calculations. For example, in periods of high inflation, LIFO users will report higher costs of goods sold than those using FIFO. A higher COGS results in lower net income and lower income taxes to pay during that time. The results are reversed for periods during low inflation (Dumont, 2012).

There are advantages as well as disadvantages for the US to follow a different financial reporting system than that of IFRS. Some differences are more beneficial for US firms while others require more work and effort to prepare their financial statements. Changes within both sets of reporting rules occur frequently so it is always important for a firm to stay informed and do their research to continue to be successful.