Accounting
GAAP vs. IFRS
The two dominant global accounting standards — GAAP in the US, IFRS in most of the rest of the world — mostly agree on the fundamentals but genuinely diverge on some specific rules, enough to change reported numbers for identical underlying activity.
Definition
GAAP (Generally Accepted Accounting Principles) is the accounting standard used in the United States, set by the FASB (Financial Accounting Standards Board). IFRS (International Financial Reporting Standards) is used in most of the rest of the world, set by the IASB (International Accounting Standards Board).
Why this exists
Accounting standards need some governing body to actually write and maintain them, and different regions historically developed their own independent standard-setting processes rather than starting from one single global system — much the way different countries maintain their own tax systems rather than one universal tax code. GAAP and IFRS are the two dominant results of that separate development.
The two systems agree on far more than they disagree on, but a few genuine points of divergence are worth knowing at a plain-language level, not to catalog exhaustively:
- Inventory valuation. GAAP permits a method called LIFO (Last-In-First-Out — assuming the most recently purchased inventory is sold first). IFRS does not permit LIFO at all, requiring methods like FIFO (First-In-First-Out — assuming the oldest inventory is sold first) instead.
- Development costs.GAAP generally requires research and development costs to be expensed immediately as they're incurred. IFRS allows certain development costs — once a project reaches a specific stage of technical feasibility — to be capitalized as an asset instead and spread over future periods, the same underlying idea as Depreciation.
Plenty of other areas are mostly just different vocabulary or procedural detail for the same underlying idea, not fundamental disagreements. And these specific rules aren't frozen — FASB and IASB periodically update them as circumstances and consensus evolve, which is exactly why this page teaches the durable concept of why two systems exist and roughly how they diverge, not a snapshot of every current technical rule.
Worked example
A company buys 100 units of inventory at $10 each, then later buys 100 more at $12 each. It sells 100 units during the year.
LIFO (GAAP-permitted): assumes the most recent purchase is sold first Cost of goods sold = 100 × $12 = $1,200 FIFO (required under IFRS, also allowed under GAAP): assumes the oldest purchase is sold first Cost of goods sold = 100 × $10 = $1,000
Same company, same 100 units sold, same year — but $200 of difference in reported cost of goods sold purely because of which permitted method was used, which flows straight through to a different reported gross profit for identical underlying business activity.
Common misconceptions
“GAAP and IFRS are basically identical, just used in different countries.”
They're mostly aligned on core structure, but genuine divergences exist — inventory valuation methods, treatment of certain development costs — that can produce materially different reported numbers for identical underlying activity, as the worked example shows.
“A company can freely choose whichever standard makes its numbers look best.”
Which standard applies is generally determined by where a company is legally domiciled or listed, not a free choice management makes to flatter results.
“These rules are permanently fixed and never change.”
FASB and IASB periodically revise specific rules as circumstances and consensus evolve. What's durable is the reason two systems exist and roughly how they diverge — not any single frozen technical rule.
Also in the Glossary: FIFO (First-In-First-Out), GAAP, IFRS, LIFO (Last-In-First-Out)