Introduction
International Financial Reporting Standards (IFRS) are a set of accounting guidelines for public firms’ financial statements, designed to make these statements uniform, transparent, and easy to compare globally. In turn, developed by the Financial Accounting Standards Board (FASB), the Generally Accepted Accounting Principles (GAAP) are mandated by public firms in the United States. Although it pursues the same objectives of transparency and simplicity, GAAP approaches accounting differently based on the chosen context. In this context, the current report compares the two systems in terms of their approaches to accounting for inventories, property, plant, and equipment (PP&E), and intangible assets.
Inventories
GAAP implies that inventory must be reported using the application of FIFO over net asset value (NAV) or the lower cost. As FASB (2023) established in 2017, this method should be prioritized over using replacement costs. In turn, the costing regulations under IFRS recommend a different approach.
Apart from the lesser cost, it specifies that net realizable value should be used to calculate inventory (IFRS, 2023). In this context, it is essential to note that both parties use the term net realizable value to refer to distinct concepts. IFRS defines the net realizable value as the projected selling price minus any reasonable costs associated with a chosen transaction (IFRS, 2023).
In turn, by net realizable value, GAAP implies the closest representation of expectations for inventory realization (FASB, 2023). However, despite having significant differences, the two systems’ inventory costing approaches are similar. For instance, inventory expenses must include all direct costs associated with preparing inventory for sale, such as overhead (FASB, 2023; IFRS, 2023). Additionally, they must exclude selling costs and the majority of other administrative expenses.
Property, Plant, and Equipment
While the fundamental concepts of IFRS and U.S. GAAP concerning property, plant, and equipment (PP&E) are generally consistent, there are several exceptions in the corresponding guidelines. Initially, both systems imply that fixed assets are to be first capitalized based on their cost, followed by depreciation (FASB, 2023; IFRS, 2023). PP&E can be considered examples of fixed assets that must be documented at their purchase price (historical cost) and gradually depreciated in accordance with GAAP (FASB, 2023). The same rule applies under IFRS (2023), but businesses can revalue property, plant, and equipment (PP&E) to its current market value.
When measuring costs, both systems tie them to the residual asset value estimation, allowing consequent remeasurements if necessary (FASB, 2023; IFRS, 2023). Conversely, in the context of depreciation, two systems adopt different approaches (FASB, 2023; IFRS, 2023). GAAP considers every PP&E asset as a single entity, simultaneously depreciating all its internal parts and disregarding their contribution to the asset as a whole. Meanwhile, IFRS advises calculating the depreciation of an asset’s parts separately, given that their cost can be considered significant within the total asset cost.
Intangible Assets
Regarding intangible assets, the two systems agree on capitalizing acquired intangibles. The differences begin when it comes to measuring their costs. IFRS proves to be more flexible as it allows businesses to choose the measurement model. According to IFRS (2023), a company should establish a single accounting policy for all intangible assets based on the cost or revaluation model.
The primary difference lies in assigning a historical or current market value to an asset’s initial cost. Consequently, the chosen value will be subtracted from impairment losses and accumulated amortization (IFRS, 2023). Conversely, GAAP does not allow the revaluation of intangibles, leaving businesses with no choice.
Both systems require businesses to conduct impairment tests as soon as one is registered. However, the systems differ extensively in the scope of available methods and the definition and conduct of similar tests. For instance, IFRS (2023) conducts goodwill impairment tests in a single step, whereas GAAP implies a two-step evaluation (FASD, 2023).
GAAP provides more comprehensive advice than IFRS regarding intangible asset accounting in certain instances. For instance, in comparison to IFRS, FASB (2023) has developed stricter rules regarding the amortization of capitalized amounts related to computer software. Additionally, GAAP stipulates that a defensive intangible must be treated as a separate accounting unit with a limited lifespan since it is rare for an asset to possess an indefinite life (FASB, 2023). In the meantime, IFRS does not provide specifications to such depth.
Conclusion
Overall, the tendencies in the above evidence illustrate a “common goal but different means” situation between IFRS and GAAP. Both systems initiate accounting at a similar step, but then differ in minor peculiarities about the subject. For inventories, IFRS deducts any reasonable costs from the expected inventory realization before determining its net realizable value.
Moreover, IFRS states that depreciation should be applied to the components of PP&E separately, given that their value is reasonable. Finally, IFRS permits the revaluation of intangible assets based on their current market price. In short, IFRS tends to emphasize accounting flexibility more, whereas the FASB prefers a straightforward approach.
References
FASB. (2023). Codification. Web.
IFRS. (2023). IFRS Accounting Standards Navigator. Web.