This document provides an overview of the key differences between GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards). GAAP is the standard used in the United States, while IFRS is used in over 110 other countries. Some similarities include how inventory, revenue recognition, and financial statement presentation are handled. However, there are significant differences in areas like ratios, inventory valuation methods, and level of rules/principles. While GAAP is more rules-based, IFRS is more principles-based. The document also discusses advantages and disadvantages of each standard and how different countries may prefer one over the other depending on factors like laws, regulations and religious beliefs.

1. GAAP versus IFRS
A comparison between both Gaap and Ifrs
Prepared for
Dr. Grace Wetzel
Assistant Professor at Saint Joseph’s University
Philadelphia, Pennsylvania, 19131
Prepared by
Yousef Gari
Philadelphia, PA 19131
December 6, 2016

2. Table of contents
Executive summary……………...………………………………………i
Introduction……………………………………………………………...4
Purpose and Scope…………………………………………….4
Methods……………………………………………………….4
Limitations…………………………………………………….4
Definitions…………………………………………………….4
Background and history…………………………………………………5
Identifying GAAP…………….………….……………………....5
History of GAAP…………………………………………………5
Identifying IFRS………………………….………………………5
History of IFRS………………………….……………………….5
Similarities………………………………………………………………6
Inventory…………………………………………………………..6
Revenue Recognition……………………………………………...6
Presentation of financial statements………………………………6
Differences.……………………………………………………………..6
Overview…………………………………………………………..7
Ratios………...……………………………………………………7
Inventory…………………………………………………………..7
Advantages…………………………………………………………........7
Advantages of using Gaap………………………………………...8
Advantages of using Ifrs…………………………………………..8
Disadvantages of using Gaap……………………………………..8
Disadvantages of using Ifrs…………………………………..…...8
Conclusion………………………………………………….…………...8

3. GAAP Versus IFRS
A comparison between GAAP and IFRS
Executive summary
Ifrs and Gaap are two completely different accounting standards that are followed by almost all
countries around the globe. Gaap, which is used in the United States has so many differences
than Ifrs. Ifrs on the other hand is used in over 110 countries in Europe, Asia, and the Middle
East. There are so many differences and similarities between the two types of standards, and I
will highlight the ones I thought are important.
The research I have done highlights some important aspects of the accounting standards. In
addition, with my interviewee’s help I will minimize the list to the key ones since there are
many. I will also define the two types and provide backgrounds on both of them to further help
with comprehending the accounting terminology. I will be addressing how the financial
statements (balance sheet, income statement…etc.) are presented in Gaap and Ifrs along with
many other accounting terms such as Lifo, Fifo and depreciation.
1- Overview and backgrounds on both GAAP and IFRS
 Timeline of the two types established date, and by whom were they founded
 The countries that use between of GAAP & IFRS
2- Key differences on the both standards and why some countries prefer either one of
them
3- Analysis of the similarities, advantages, disadvantages of either one
 Provide details on the presentation of the financial statements in terms of
differences
 Talk in details on how are for instance Lifo and Fifo treated along with other
important terms that exist within the financial statements

4. Introduction
To better understand what the differences between Gaap and Ifrs are, I performed a comparison
analysis between the two types of standards to see the similarities, differences, and advantages
and disadvantages to using either one. There’s also a brief discussion on when and how the kinds
of standards began early in the 20th
century as well as where these standards are used.
Purpose and Scope
Gaap and Ifrs are two different standards that have been followed for years. Gaap is used in the
US and Ifrs is used in over 110 countries around the world. Some countries find it useful to
choose Ifrs over Gaap, but not the United States. The purpose of my research is to identify what
are the differences between the two.
This report will cover several topics such as similarities, differences, advantages and
disadvantages of each, and why countries choose either one. My research will not include any
on-site research in Europe.
Methods
This report contains information that comes from online academic sources on the University
library website. Moreover, one accounting professional (Dr. Lin) was interviewed for this report,
and the interview took place in the accounting department on November 29th
, 2016.
Limitations
The information in the report was limited to sources that were used. I could not go to Europe or
other places to conduct an on-site research. There is also a language barrier that hindered me
from reading Russian, German, and French articles, and hence, these limitations exist because I
was unable to travel to Europe.
Definitions
There are a few terms I used throughout the report that I would like to define the first term is
IASB which stands for international accounting standard board. Other terms are LIFO and FIFO
which stands for last in first out, and first in first out. Also, Zakah which is a tax law that is
commanded by Islam. Ratios, and these are percentages to gauge the company’s performance.

5. Background and history
In order for us to gain a better understanding throughout the whole report we must identify and
explain what these acronyms stand for and briefly demonstrate what they mean. Also, we must
know where these standards are followed. The following information is a history on both Gaap
and Ifrs. Each one has a different story of how it began, so I will talk about both of them.
Gaap definition
Let us begin by identifying Gaap. Gaap is an acronym for Generally Accepted Accounting
Principles which is followed by countries like the United States of America. In addition, Gaap is
a set of rules and standards for financial reporting. According to Kiseo, Weygandt, and Warfield
“the objective of financial reporting is to provide financial information about the reporting entity
that is useful to present and potential equity investors, lenders, and creditors” (page 5). What the
quote alludes to is that all companies must comply with these rules. In other words, the
accounting rules must be met by all companies or it is considered a violation. In other words, a
fraud or a white collar crime is reported. All accountants and anyone who’s in this profession
must have a proper knowledge or the individual won’t be able to perform job tasks.
History of Gaap
If companies do not follow the rules of accounting, and do the reporting based on their own
interest, then creditors and investors will be given inaccurate and misleading information. “The
Great Depression in 1929, a financial catastrophe which caused years of hardship for millions of
Americans, was primarily attributed to faulty and manipulative reporting practices among
businesses” (Accounting.com). Historically, people did not have any guidelines for reporting
which resulted in negative outcomes, but now there are rules that must be obtained otherwise
serious consequences will occur such as getting sued or an economic deficiency.
IFRS definition
Ifrs is the other kind of standards that is followed all over Europe and Asia. It is different than
Gaap because it is principle-based where Gaap is rule-based. “Principle based means simpler
where rule-based means more detailed” (Intermediate accounting page 31). Ifrs stands for
International Financial Reporting Standards, which is a set of standards that is developed for
global use by International Accounting Standard Board. Ifrs is helpful for companies that have
their own sub-parents across the world because they’ll have particular criteria to follow.
History of IFRS
There is not a specific timeframe or a date for Ifrs accounting standards. It was created by the
International Accounting Standard Board as a result of harmonizing all European countries. In
addition, “The international standard-setting process began several decades ago as an effort by
industrialized nations to create standards that could be used by developing and smaller nations
unable to establish their own accounting standards.” (IFRS.com). Determining a particular date
would be difficult because it is used worldwide. Meaning that each country began at a different
time.

6. Similarities between Gaap & Ifrs
It is hard to find a huge number of similarities like the number of differences. However, there are
a few similarities between the two accounting standards. Some are more important than others. I
have minimized the similarities to revenue recognition, inventory (Lifo and Fifo), and how all
information is presented.
Inventory
When reporting inventory, both Gaap and Ifrs consider the cost as their basis when performing
either Lifo which stands for “last in first out” or Fifo which stands for “first in first out”. Lifo and
Ffio are both methods of measuring inventory. Also, Ifrs and Gaap both have the same definition
for inventory, which is an asset that is kept for sale. Both Gaap and Ifrs use the same
measurement method Fifo, it is not different. However, Ifrs does not permit Lifo. When
following either sets of standards, both consider the same cost of inventory such as cost direct
expenditure.
Any business major must be familiar with these two approaches (Fifo and Lifo) because they are
very important. Whether you’re a salesman or a manager, you must have a background about
how Fifo and Lifo are performed. In addition, Lifo has an advantage over Fifo because it’s last
items are the first ones to go out, which means that you will end up paying less taxes. Ifrs
prohibits Lifo which we’ll discuss in the differences section.
Revenue Recognition
When it comes to revenue recognition, both kinds of standards share a really important aspect,
which is that both Ifrs and Gaap recognize revenue when it is realizable and earned. Under Ifrs
revenue represents the “gross inflows of economic benefits during the period arising in the
course of ordinary activates”. On the other hand, under Gaap, revenue represent “actual or
expected cash inflows that have occurred or will occur from the entity’s major operation” (Sedki,
Smith, and Strickland). Both definitions seem to be very similar in meaning, yet the requirements
that need to be met are different.
Presentation of financial statements
Both Gaap and Ifrs have identical financial statements, and the presentation of all of them is
almost the same. Also, both require that the financial statements are prepared on an accrual basis
with exception for the statement of cash flows (EY). Accrual basis means that revenue is
recognized as if it is earned not when the cash is received, and it is earned when the service is
provided. For instance, think of yourself as a pizzeria owner. You’ll get paid for pizza online
often times, so you do not earn the revenue until you deliver the pizza that has been ordered.
Differences between Gaap and Ifrs
There are so many differences between the two different standards. For example, inventory,
revenue recognition, accounting for leases, goodwill, depreciation, and many more. In addition,
after I had done my interview with Dr. Lin, I found out that there aren’t differences that are more

7. important than others. It is very subjective to the business and the country itself because the
differences vary according to where the company is based and what kind of business it is doing.
Accounting changes from one country to another; therefore, Ifrs does not have as many rules as
Gaap has, hence this is why it is identified as principle-based where Gaap is more rule-based.
“The directive strives to achieve comparability within the EU, which before IFRS each country
had different accounting standards, thus making it more complex for investors to decipher which
investment opportunity was more favorable” (O’Farrell & LIU).
The rules in Saudi Arabia for instance, are not the same with France or Germany, also there are
rules that often times correspond to religious teaching. Some countries do not take religious
beliefs into considerations while others do like Saudi Arabia. A profound example would be tax
accounting because the Saudi government does not require any income tax or sales tax from
civilians. However, Islamic law finds it mandatory for you as a Muslim individual to provide a
really small portion of your income every year to the poor. The companies must do that as well.
The religious term is Zakah, that is why Saudi companies often require Zakah accountants.
Ratios
Ratios are very helpful tools in order to measure the company’s performance, and they’re special
because of the simplicity in them. There are so many of them and each number tells something
different about the company; for example, the current ratio which measures the company’s
ability to handle short-term debt (obligation).
Ratios can be different depending on the accounting standard that you’re following. The number
will have a significant change, which will result in a misled interpretation from the investor’s
perspective. O’Farrell and Liu compared many ratios from the well-known German company
Siemens. They found out that when calculating profitability, liquidity, and debt ratios, the
numbers change and favor Ifrs more. “Under IFRS, the return on equity for 2007 is 13.63% with
a total equity of €29,627 million and a net income of €4,038 million. Under US-GAAP, the
return on equity for 2007 is 7.96% with a total equity of €30,379 million and a net income of
€2,417 million”. If you take a look at results, there is a significant change in percentages which
overstates and favors Ifrs.
Inventory
Inventory calculation is a very important aspect of financial accounting, if not the most critical
because companies rely on these calculation methods to find out the cost of goods sold and
ending inventory. Companies highly benefit from using Lifo which is the banned method in Ifrs
because they believe that it “distorts the figures of inventory on the balance sheet”
(Investopedia.com). Costs per unit change within time; therefore, companies want to use Lifo in
order to react to inflation. When companies use Fifo they will end up with a lower cost of goods
sold than Lifo, which then will result in a higher gross margin (profit). A higher gross profit
means a higher tax bill. On the other hand, Lifo has a higher cost of goods sold, meaning that it
will reduce net income more than Fifo. As a result, the company won’t receive as high tax bill as
it will if it used Fifo method.

8. That is why Ifrs accounting does not permit that and think of it as a way to get away with tax
bills. Moreover, Ifrs think that the representation will vary if the inventory method is changed. I
will look at the same example above but with added numerical demonstrations. Say you’re using
Fifo and your net income is 5,000. Fifo is going to result a lower cost of goods sold, say it’s
2,000. Gross profit (5,000-2,000) is going to be 3,000. Conversely, Lifo’s cost of goods sold is
say 3,000. Gross margin is going to be 2,000 (5000-3000). Fifo would indicate a better
representation of the company regardless of the higher tax bill that is paid.
Advantages and Disadvantages of Gaap
There are of course many advantages and disadvantages of following either method, and each
reporting standard has its cons and pros just like any aspect of accounting. I am not implying that
either one is better. In fact, I am just highlighting based on my interview and my research, some
of these cons and pros.
Cons and Pros of Gaap
Having so many rules helps the company keep up the consistency, especially when making the
financial statements, and it also helps with minimizing the chances of fraud and false
information. It is believed that Gaap accounting is a way to safeguard your company. According
to SmallBusiness.com, “Presenting your information using GAAP also helps to instill trust in
those with an interest in your company”.
On the flip side, according to the professional who I interviewed having so many rules compel
companies to find ways to get around and play with numbers. In addition, having so many rules
can be very confusing for companies. Lastly, some rules may conflict and intercept with other
rules which also makes it hard for companies when doing financials.
Cons and Pros of Ifrs
According to Dr. Lin “not having rules can ease the comparability process among companies in
Europe or Asia”. Ifrs also helps investors who want to enter a foreigner market. A profound
example is an investor in Europe who wants to enter surrounding countries because they are
fairly close.
For the downside, not having rules can help companies be more manipulative since they are not
in the same territory. Also, every company comes from a different country, and each country has
its own and distinct laws and regulations. This plays a role in hindering companies across
different nations; for instance, Islamic countries that have different taxing rules.
Conclusion
In sum, the two standards are loaded with a lot of information, and some would think that some
information is more important than other. It really depends on the industry every company is in,
and it’s subjective to where these companies are in the Ifrs case. Gaap (rule-based) was founded
in the United States in the 1930s right after the great depression. Ifrs was formed decades ago as
a result of harmonizing European countries.

9. There is a tremendous number of differences, and hence, it really depends on the nature of the
company. Supermarkets for instance are different than natural resource companies, so they
would use inventory methods differently. Ifrs doesn’t permit using two inventory methods, it
thinks it is unfair.

10. References:
"The Comprehensive Guide to Understanding GAAP Accounting.com." Accounting.com.
N.p., n.d. Web. 26 Nov. 2016.
Kieso, Donald E., Jerry J. Weygandt, and Terry D. Warfield. Intermediate Accounting.
Hoboken, NJ: Wiley, 2013. Print.
"International Financial Reporting Standards (IFRS)." (2015): 1-16. IFRS.com. AICPA.
Web. 26 Nov. 2016.
Sam Sedki, S., Abby Smith, and Aissa Strickland. "Differences and Similarities Between
IFRS And GAAP On Inventory, Revenue Recognition And Consolidated Financial
Statements." Journal Of Accounting & Finance (2158-3625) 14.2 (2014): 120-123. Business
Source Complete. Web. 27 Nov. 2016.
O'Farrell, Grace, and Liu Chunhui. "Impact Of Differences Between International
Financial Reporting Standards And Us Generally Accepted Accounting Principles On Perceived
Company Performance." International Journal Of Business, Accounting, & Finance 9.2 (2015):
103-111. Business Source Complete. Web. 3 Dec. 2016.
Tun, Zaw Thiha. "When & Why Should a Company Use LIFO." Investopedia. N.p., 28
May 2015. Web. 06 Dec. 2016.
Davoren, Julie. "What Are the Benefits of the GAAP?" What Are the Benefits of the
GAAP? | Chron.com. N.p., n.d. Web. 06 Dec. 2016.