GAAP vs. IFRS: Key Differences & Complete Guide (2025)

Compare US and global accounting standards in 2025. Discover the latest regulations and explore which standard aligns with your business objectives.

Investors, lenders, and regulators all read the same language: financial statements. Without shared rules, the numbers behind those statements can tell wildly different stories. 

For example, one company could book a five-year, $1 million service contract as upfront revenue, while another records the same deal in $200,000 annual chunks. The first company will look much more profitable, even though their cash earnings are identical.

Two standards help prevent this situation from happening: generally accepted accounting principles (GAAP) in the United States and International Financial Reporting Standards (IFRS) used in other markets. 

Learn about the key differences between GAAP and IFRS and where they overlap, and discover the latest updates in this guide. 

What are generally accepted accounting principles (GAAP)?

Generally accepted accounting principles (GAAP) are the accounting standards set by the Financial Accounting Standards Board (FASB) for public companies, as required by the Securities and Exchange Commission (SEC) in the United States. 

GAAP is a rule-based system that all domestic publicly traded companies must follow when filing financial statements. Although Canada once mirrored GAAP, its publicly accountable enterprises fully adopted IFRS in 2011. Now, only certain rate-regulated or SEC filers may still use GAAP in Canada. 

All GAAP guidance resides within the FASB Accounting Standards Codification (ASC), a searchable database that organizes approximately 90 accounting topics and serves as the authoritative source for nongovernmental entities.

What are International Financial Reporting Standards (IFRS)?

International Financial Reporting Standards (IFRS) are the accounting standards set by the International Accounting Standards Board (IASB). It’s a set of guidelines required or permitted in 160-plus jurisdictions, including 15 of the G20 economies.

China, India, and Indonesia do not follow IFRS accounting standards but have similar standards, while Japan allows companies to follow IFRS standards if they choose.

To keep pace with investor demand for environmental transparency, the IFRS Foundation introduced new standards (IFRS S1 and IFRS S2) that rope climate and sustainability metrics into financial reporting. 

The International Organization of Securities Commissions (IOSCO), whose members regulate 95% of the world’s capital markets, formally endorsed the standards in July 2023 and urged jurisdictions to implement them.

By May 2024, jurisdictions covering more than half of global GDP—including Australia, Brazil, Canada, China, Japan, Mexico, and the UK—had announced plans to adopt or align with these rules. 

GAAP vs. IFRS: What are the differences between GAAP and IFRS?

While GAAP and IFRS both pertain to how financial documents are structured and filed—and they both often include comprehensive income reporting—there are significant differences. 

When thinking about the difference between IFRS and GAAP, the two main distinctions are: 

• Enforcement: GAAP is rule-based, meaning publicly traded US companies are lawfully required to follow its directives. On the other hand, IFRS is standards-based and leaves more room for interpretation and sometimes requires lengthy disclosures on financial statements.
• Source and scope: GAAP is US-based, while IFRS is used worldwide. The only exception is the US, where the SEC requires American companies to use GAAP when preparing their financial statements.

There are other notable differences in how GAAP and IFRS handle specific elements of various financial documents, including these eight things:

	GAAP (US)	IFRS (Global)
Inventory valuation	FIFO, weighted average, or LIFO allowed.	FIFO or weighted average only (LIFO banned).
Cash flow statement	Interest paid/received and dividends received → operating activities. Dividends paid → financing activities.	May present interest and dividends received in operating or investing (must be consistent). May present interest and dividends paid as operating or financing (must be consistent).
Balance sheet	Lists assets by liquidity (current first), then liabilities, then equity.	Order is flexible. List non-current assets first, but a liquidity order is also allowed.
Asset revaluation	Upward revaluation limited to marketable securities. Property, plant, and equipment (PPE) and intangibles stay at historical cost.	PPE, investment property, and some intangibles can be revalued to fair value.
Inventory write-down reversals	Write-down required when value falls. No reversal if it later recovers.	Write-down required, but reversal allowed up to original cost when value rebounds.
Development and other R&D costs	Nearly all research and development outlays expensed immediately.	Research expensed, and development capitalized once feasibility is proven and then amortized.
Investment valuation	No FVOCI option for equities.	Can route non-trading equity gains to OCI.

1. Inventory valuation 

The process of determining the value of your inventory is known as inventory valuation. 

There are three standard accounting methods for inventory valuation: 

1. The first in, first out (FIFO) method assumes the first (or oldest) items in your inventory will be the first to sell. 
2. The last in, first out (LIFO) method assumes the last (or newest) items in your inventory will be the first to sell. 
3. The weighted average method uses the average purchase or production cost of your inventory to determine the value of the remaining portion.

GAAP treatment

GAAP allows US companies to use FIFO, LIFO, or weighted-average for inventory valuation. For most inventory, GAAP requires carrying inventory at the lower of cost or net realizable value (NRV); the older “lower of cost or market” applies only to LIFO and retail inventory.

IFRS treatment

IFRS prohibits the LIFO method because it can result in inventory values that do not reflect the actual physical flow of goods and can reduce the relevance and comparability of financial statements across companies.

For example, look at this timeline:

January: Buy 100 units @ $10 each

March: Buy 100 units @ $15 each

June: Sell 150 units

Under IFRS, the company could not choose LIFO, so its COGS would be $1,750 and ending inventory $750.

Under GAAP using LIFO, the company’s COGS would be $2,000 and ending inventory $500. Higher COGS lowers gross profit and taxable income. 

2. Cash flow statement

A cash flow statement is a financial statement that shows precisely how cash and cash equivalents enter and exit a business over a specific reporting period. 

GAAP and IFRS handle cash flow statements differently, particularly in how they classify interest and dividends:

• GAAP: Interest paid and received, as well as dividends received, are all listed under the operating section, while dividends paid are listed in the financing section.
• IFRS: All interest and dividends can be listed under the operating or financing section.

3. Balance sheet

A balance sheet is a financial statement that summarizes a company’s assets, liabilities, and shareholder equity at a given point in time. It’s essential to know how to organize your balance sheet so your investors and other interested parties can quickly and accurately read it. 

GAAP and IFRS differ in how categories are arranged on a balance sheet.

• GAAP: A typical balance sheet presents assets in order of liquidity, with the most liquid assets listed first—that is, current assets, non-current assets, current liabilities, non-current liabilities, and owners’ equity.
• IFRS: Allows putting assets in the opposite order of liquidity, although it’s common to list non-current assets first, followed by current assets, owners’ equity, non-current liabilities, and current liabilities.

4. Asset revaluation

The value of a company’s assets may fluctuate over a given period. When that happens, they need to be reevaluated (i.e., reappraised). Asset revaluation is crucial because it can help you save for the replacement costs of fixed assets once they’ve run through their useful lives. 

It also gives investors a more accurate understanding of your business. Plus, asset revaluation can reduce your debt-to-equity ratio, which can paint a healthier financial picture of your company. 

GAAP and IFRS have different approaches to asset revaluation.

• GAAP: Only allows the revaluation of fair market value for marketable securities (i.e., investments and stocks).
• IFRS: Allows for the revaluation of more assets, including plant, property, and equipment (PPE), intangible assets like goodwill in accounting, and investments in marketable securities.

5. Inventory write-down reversals

A company’s inventory may lose value over time. For example, an asset may lose value because of market or technological factors, which classifies it as a “loss on impairment.” Both GAAP and IFRS require businesses to write down their inventory as soon as its cost exceeds its net realizable value (i.e., how much the inventory is expected to generate when sold). 

While a loss is often permanent, the value of an asset may increase again if the impairing factor is no longer present. GAAP doesn’t allow companies to re-evaluate the asset to its original price in these cases. In contrast, IFRS allows some assets to be evaluated up to their original price and adjusted for depreciation.

6. Development costs

In accounting, development costs are the internal costs of developing intangible assets—assets with no physical form, like patents, intellectual property, and client relationships. 

GAAP considers these intangible assets expenses, while IFRS allows companies to capitalize and amortize them over multiple periods. Your accounting standard, therefore, determines where on your financial documents you must list intangible assets, which affects your balance sheet’s final record.

7. Research and development costs

Brands are consistently looking to improve their product features and integrate new technologies into their business operations. All that time and money spent is classified as research and development, or R&D. 

Under GAAP, these expenses are recognized immediately. ASC 730 requires nearly all R&D outlays—such as prototype design, testing, and coder salaries—to be recorded on the income statement as they occur.

Under IFRS, a company must meet certain criteria before capitalizing development costs. IAS 38 lets companies carry eligible development costs as an intangible asset and amortize them over future periods, while pure “research” spend is still expensed.

In practice, say a startup invests $600,000 in building a new app. 

• GAAP: The full $600,000 is recorded as an expense, reducing net income. 
• IFRS: Once the app proves feasibility, $400,000 of later costs get capitalized and amortized, so 2025 profit looks $400,000 higher.

⚠️2025 note: FASB is finalizing rules that would break out capitalized software costs separately on the cash-flow statement and tighten the triggers for capitalization under ASC 350-40. The Board completed redeliberations on May 7, 2025, with a final Accounting Standards Update (ASU) expected later this year.

8. Investment valuation 

Brands sometimes park cash in treasuries, ETFs, or minority stakes in other startups. The way these positions are measured can affect reported profit and net asset value.

Both accounting standards start with the same three-level fair value hierarchy:

• Level 1: Quoted prices in active markets, like listed shares.
• Level 2: Observable inputs other than quoted prices, like bond prices from similar issuances.
• Level 3: Unobservable inputs or valuation models, like SAFE notes. 

Both US GAAP and IFRS require companies to disclose how they value hard-to-measure (Level 3) investments, but only IFRS requires companies to show how much those values could change if their key assumptions are different. GAAP just requires details about the estimates used, not a full analysis of potential changes.

Under GAAP, you’ll classify debt investments as trading, available for sale (AFS), or held to maturity. Trading and AFS securities are marked to market.

Unrealized gains from trading are reflected in net income. AFS gains are realized in comprehensive income (OCI). Equity stakes default to fair value through net income under ASC 321.

Under IFRS, the buckets have different labels:

• Fair value through profit or loss (FVTPL): Record all unrealized gains or losses in the income statement each reporting period, so earnings move with market prices.
• Fair value through OCI (FVOCI): Park unrealized gains or losses in other comprehensive income, keeping them out of net profit until disposal (or permanently for certain equities).
• Amortized cost: Keep the asset at its initial cost, adjusted for principal repayments and the effective interest rate, with no fair-value swings hitting the accounts.

Under IFRS, companies can make a one-time, irrevocable election to present changes in fair value of certain non-trading equity investments in other comprehensive income (OCI), rather than profit or loss. US GAAP does not permit this option—fair value changes for equity investments must be recognized in net income.

Industry-specific impacts of GAAP and IFRS

Accounting standards seem abstract until they show up in your day-to-day operations. Here are some areas where GAAP and IFRS will matter.

DTC ecommerce and retail

Inventory is one of the largest current assets on your balance sheet. 

Under GAAP, you can choose LIFO for inventory valuation, which can lower taxable income during inflation. IFRS does not allow LIFO. Companies using IFRS must use FIFO or weighted average cost. If you expand overseas or want to attract foreign investment, you may need to align with IFRS and switch to approved methods.

SaaS

Both standards follow the same five-step revenue recognition model (ASC 606/IFRS 15), but they differ in their treatment of R&D costs. 

US GAAP makes companies expense most R&D costs right away, while IFRS lets them spread out (capitalize) development costs over time once a project is likely to succeed, potentially boosting early profits.

That one rule can turn a loss-making GAAP startup into a break-even IFRS success story. This is because profits look much healthier under IFRS, even though the cash outlay is identical. 

Subscription boxes and membership programs 

When you sell a gift card or a prepaid subscription, the cash comes in, but you still owe the customer goods or services. It sits in your books as a contract liability.

Under GAAP, if your data shows that 5% of gift cards are likely to never be redeemed, you can recognize this 5% as revenue over time as cards are used. With IFRS, you generally have to wait longer and can only record that 5% as revenue when it’s very likely the customer won’t use the card, so revenue recognition is usually slower than under GAAP. 

Under IFRS, you can’t treat any of it as revenue until it’s almost certain the customer won’t redeem it, which takes longer. 

Which is better: GAAP vs. IFRS?

It depends on the context. Here is a general rule of thumb:

• Go with IFRS if you plan to raise international capital, operate subsidiaries overseas, or benefit from asset revaluations and R&D capitalization.
• Stick with GAAP if you’re US-centric, must file with the SEC, or rely on the LIFO inventory valuation method, since only GAAP allows LIFO.

Use the following scenarios to check which standard fits your growth plans.

When IFRS makes more sense

• You plan to raise funds overseas. If you expect to pitch European or Asian investors, they’ll ask for IFRS statements.
• You’re expanding overseas. IFRS and its variations (i.e., India’s Ind AS) are the global standard. Adopting IFRS can cut down on GAAP-to-IFRS conversion headaches and audits. 
• You have a large R&D budget. IFRS lets you spread out costs over a period of time, so early-stage losses don’t scare off investors or lenders. 
• You own appreciating real estate or IP. IFRS lets companies update the value of assets like buildings, equipment, and intellectual property to reflect current market prices, which can increase reported equity. GAAP usually does not allow these updates and keeps assets at their original purchase cost, except for some financial investments. 

When GAAP is the better fit

• Your stakeholders are US-centric. The SEC, most domestic banks, and US tax authorities expect and may even require GAAP.
• You’ll operate only in the US. GAAP keeps you compliant with federal and state rules. 
• You prefer a conservative, rules-based approach. GAAP is a safer bet if you don’t want to make judgment calls. It makes you expense R&D immediately and forbids writing assets up to higher market value. 

GAAP vs. IFRS FAQ

Is U.S. GAAP equivalent to IFRS?

No. GAAP (generally accepted accounting principles) is a rules-based framework issued by the US Financial Accounting Standards Board. IFRS is a principles-based set of standards issued by the International Accounting Standards Board. Both share the same goal of creating clear, trustworthy financial statements, but differ on aspects like inventory, asset valuation, and disclosure requirements.

What is the difference between IFRS and GAAP?

The key differences include:

• GAAP is based on legal authority; IFRS is principles-based.
• GAAP is more detailed and prescriptive; IFRS is more flexible.
• GAAP emphasizes historical cost; IFRS allows more flexibility in asset valuation.

Why is IFRS not used in the US?

IFRS is not used in the US because it has not been adopted as the official accounting standard. The US uses its own GAAP. Although the government has considered IFRS adoption, no official move has been made.

What is the difference between GAAP and IFRS in inventory?

Key inventory differences:

• GAAP uses “lower of cost or market value”; IFRS uses “lower of cost or net realizable value.”
• GAAP prohibits reversal of write-downs; IFRS allows it.
• GAAP permits FIFO, LIFO, weighted-average; IFRS prohibits LIFO.

Can US companies use IFRS?

Yes. US companies can use IFRS, especially those operating internationally, alongside or instead of GAAP when applicable.

What does IFRS stand for?

IFRS stands for International Financial Reporting Standards.