International Financial Reporting Standards - IFRS

The United Nations vs. the U.S. Congress.

Interpol vs. the FBI.

Paris, France vs. Paris in Las Vegas.

The International House of Pancakes vs. uh...Waffle House.

We’re talking international vs. domestic. Things that happen in exotic foreign locales versus things that happen...close to home.

Which brings us to IFRS vs. GAAP.

IFRS stands for International Financial Reporting Standard. It provides an international standard for accountants to use when they’re preparing their companies’ books.

It was developed by the London-based International Accounting Standards Board, and has been adopted by about 120 countries. No one’s told it yet that it’s been adopted though so, um…mum’s the word.

Our other acronym of the day, GAAP, stands for Generally Accepted Accounting Principles. It represents a set of detailed accounting guidelines. The rules for GAAP are laid out by the Financial Accounting Standards Board, a private, non-profit organization headquartered in the U.S.

Even though GAAP was developed in the U.S., a lot of international companies use the guidelines in their accounting preparation. If a company wants to do business in the U.S., it needs its financial figures to fit into GAAP standards.

And if it wants to draw investors from the U.S., there’s a benefit to complying with GAAP.

IFRS and GAAP are generally compatible, aside from the occasional tiff. And the groups responsible for the separate guidelines are constantly making tweaks to bring the two into closer alignment. As a result, a company doesn't really have to choose between the two. However, there are some key differences.

It’s a classic Venn diagram situation. A company can make decisions so that it fits both the two standards, making everyone happy. But there are certain accounting choices that only fit into one or the other.

For instance, IFRS allows fewer types of inventory accounting. Under GAAP accounting, a company can choose between three methods of inventory accounting. They can use Weighted Average Method, which represents the most vanilla way to figure out the value of the finished products the company has sitting in its warehouse.

Or the company can use two more specific methods: FIFO or LIFO. FIFO is First In, First Out. Under this system, a company assumes that the oldest items it holds in inventory are the first ones sent to clients. And then there’s LIFO, which is Last In, First Out. Here, the most recently-produced inventory gets shipped out first. Presumably, the older stuff just sits there, gathering dust.

Under GAAP accounting, a company looking to value its inventory can go with weighted average, LIFO, or FIFO. However, IFRS only allows two of the three: LIFO is prohibited under its guidelines. So if a company wants to be both GAAP and IFRS compliant...it would have to drop its swingin’ LIFO lifestyle and switch to FIFO.

So yeah, that’s just one example of the differences between the two standards. There are many little points of contention. A company can fit its accounting practices into both...but doing so means sticking to a relatively narrow set of rules. Like, you can order the same stuff at IHOP and Waffle House. But you have to limit yourself to a pretty limited diet of waffles and hash browns.