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International Financial Reporting Standards (IFRS) differ from the US Generally Accepted Accounting Principles (US GAAP) on multiple levels, including the four main financial statements. According to Levy et al. (2018), most of the world uses the IFRS system while US businesses operate under GAAP standards. In terms of the income statement, the difference is portrayed by debts being placed in the expense category according to the US GAAP system. In IFRS, they are under revenue offset. Additionally, US GAAP requires extraordinary items to be included in net income while they are not included in the statement of income based on the IFRS system. A change within the US system would benefit corporate management since the system will be more straightforward and internationally recognized.
Another contrasting concept is highlighted in the statement of the owners equity. IFRS standards include three categories for owners account (reserves, accumulated losses and profit, and share capital). However, the GAAP system divides it into retained earnings and contributed capital. The changes in equity are to be separately presented for IFRS and included in financial statements based on GAAP protocols.
In terms of cash flow, IFRS allows for more flexibility since organizations can place the interest paid in the operating or financing section while interest received is under operating or investing. On the other hand, US GAAP requires the interest paid/received to be classified as operating activities (a category within the financing section). Dividends paid are financing activities according to GAAP standards and operating or investing activities under IFRS. US corporations would benefit from a more transparent and flexible model that can lead to an increase in international investments and a decrease in interest rates. Regarding the balance sheet, IFRS standards call for listing non-current assets first, opposite to the GAAP system. Moreover, assets are listed based on liquidity (US GAAP), while IFRS requires the opposite (reverse liquidity).
Reference
Levy, A., Bouheni, F. B., & Ammi, C. (2018). Financial management US GAAP and IFRS standards. John Wiley & Sons, Incorporated.
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