IFRS refers to the International Financial Reporting Standards, a set of international accounting guidelines that dictate how different types of transactions are to be reported in various financial documents. GAAP are the Generally Accepted Accounting Principles set forth by the Financial Accounting Standards Board (FASB) and is the commonly accepted practice for recording such transactions in the US. However, both have significant differences in a number of areas, including:
Inventory: Last in/first out (LIFO) accounting methods are prohibited in IFRS, but perfectly acceptable in GAAP. Also, IFRS is lenient toward inventory reversals while it is disallowed under GAAP. Lastly, GAAP says inventory must be held at the lower of cost or market value while IFRS calls for lower of cost or net realizable value.
Expense Recognition: Typically, expenses under GAAP are not only recorded when they happen, but recorded in full. However, IFRS allows for the capitalization of some costs to adjust for depreciation.
Restructuring Costs: While both methods require these costs to be recognized as it relates to property, plants and equipment, which costs to include and when to recognize liability are different. Unlike IFRS, GAAP divides these costs into three types: cost to terminate a contract, termination benefits and costs to relocate workers or consolidate facilities.
Cost Elements and Measurements: Both GAAP and IFRS value assets at cost initially, but IFRS ultimately allows for an adjustment to fair value.
Depreciation: GAAP states that long-held fixed assets are to be valued at historic cost and then depreciated. Moreover, component depreciation is permitted under GAAP, although not necessary, but required under IFRS. Additionally, IFRS assets are valued at cost first and then reevaluated later based on fluctuations in market value.
Investments: GAAP only considers the fair market value of the investment while IFRS may consider the future benefit of the investment. IFRS also includes investment property as a separate category if its held for capital appreciation or rental income while GAAP does not.
Fair Value Model (FVM) versus Cost Model (CM): FVM remeasures the value of property at the end of each reporting period while CM measures current cost less depreciation and impairment losses. Both define fair value the same way (what a seller would receive when an asset is sold); however, GAAP contains strict principles on measuring fair value and what qualifies while IFRS has no real guidance for determining such valuation. Cost method is applied differently based on how deprecation is handled (see above).
Borrowing Costs: GAAP and IFRS have many similarities here, but IFRS essentially allows for the capitalization of interest and other costs related to the borrowing if they are attributed to "qualifying assets," while GAAP does not.
Intangible Assets: This includes things like research, development and good will. GAAP expenses these assets when they are incurred at their current fair market value while IFRS assesses whether there will be some future economic benefit and allows them to be expensed in certain circumstances.
There could be several potential issues for those first-time adopters of IFRS, especially if one is accustomed to GAAP. These issues include lack of preparedness for the complexities of the transition, misunderstanding tax implications, compliance issues, cultural barriers, and contributions to the IASB (International Accounting Standards Board), which is not mandatory but could be coercive.