US GAAP: How It Differs from IFRS#
See also
FASB Accounting Standards Codification, the official source for US GAAP (free registration required)
Financial Accounting Standards Board (FASB), the US standard setter
UK accounting standards on the Financial Reporting Council website, for UK GAAP
IFRS Accounting Standards, the official list of IFRS standards, for comparison
US GAAP is the set of accounting rules issued by the US Financial Accounting Standards Board (FASB) and used by US domestic companies. For a UK reader it is mainly a comparison point. UK-listed groups report under UK-adopted IFRS, and most other UK companies use UK GAAP, which is covered below. US GAAP still matters when you work with US banks, US-listed counterparties or US peers, because their reported numbers are prepared on a different basis.
The two frameworks have moved closer over time, but they are not the same, and the differences are most visible in impairment, hedge accounting and the balance sheet treatment of derivatives.
Key differences#
Area |
IFRS |
US GAAP |
|---|---|---|
Standard setter |
International Accounting Standards Board (IASB). |
Financial Accounting Standards Board (FASB). |
Style |
Principles based, with less detailed guidance and more room for judgement. |
More rules based, with detailed and industry-specific guidance. |
Fair value |
IFRS 13, with the three-level hierarchy. |
ASC 820, with the same three levels. The two are largely converged. See Fair-value hierarchy: Levels 1, 2 and 3. |
Credit loss provisioning |
IFRS 9 expected credit loss model, in three stages. Lifetime losses are only recognised once credit risk has increased significantly. |
CECL (ASC 326), which recognises lifetime expected losses from the day an asset is first recognised. |
Classification of financial assets |
IFRS 9, based on the business model and the contractual cash flow characteristics. |
Largely based on the type of instrument, with separate guidance for debt securities, equity and loans. |
Hedge accounting |
IFRS 9, more principles based and closer to risk management practice. |
ASC 815, with stricter and more detailed rules for qualifying. |
Offsetting derivatives |
IAS 32 allows offset only where the firm has a legal right and the intention to settle net, so netting agreements often do not reduce the balance sheet. |
Allows offset of derivatives under a master netting agreement, so reported derivative balances are often much smaller. |
Own credit on liabilities at fair value |
Changes go to other comprehensive income (OCI) under IFRS 9. |
Also go to OCI for liabilities under the fair value option. |
Reversal of impairments |
Allowed for most assets, though not for goodwill. |
Generally not allowed. |
Inventory |
LIFO is not permitted. |
LIFO is permitted. |
The offsetting difference is a significant one for banks. The same derivative book can give a very different total balance sheet under the two frameworks, which makes comparison of leverage between a UK and a US bank harder. It also explains why disclosures show both gross and net amounts.
Convergence#
The IASB and FASB ran a joint programme of convergence from the early 2000s. It succeeded in a few areas, for example revenue recognition (IFRS 15 and ASC 606) and fair value measurement (IFRS 13 and ASC 820), and fell short in others, such as financial instruments and leases. The US has not adopted IFRS for domestic companies, and a full merger of the two frameworks is not expected.
UK GAAP#
Under UK company law, a UK company chooses between IFRS and UK GAAP, with some limits. In practice:
UK-adopted IFRS: required for UK-listed groups in their consolidated accounts, and available to others. The UK Endorsement Board approves the standards for use in the UK, which replaced the EU endorsement process after Brexit.
FRS 102: the main UK GAAP standard for unlisted companies, based on the IFRS for SMEs and simpler than full IFRS.
FRS 101: the use of IFRS recognition and measurement with reduced disclosures, often used by subsidiaries of IFRS groups.
FRS 105: for micro-entities.
Banks and the other firms in the sector that you are likely to work with report under IFRS, so the rest of this series concentrates on IFRS.
What it means for valuation control#
Fair value is the same in both: the exit price concept and the three-level hierarchy are shared, so the independent price verification process, the levelling and the reserves approach are the same whichever framework the firm reports under.
Differences sit around the valuation: the gap is in what is measured at fair value, how the P&L is split between profit or loss and OCI, and how derivatives are presented on the balance sheet, not in how fair value is measured.
Check the basis when comparing: when comparing the reported figures of a US and a UK bank, such as Level 3 balances, derivative assets and provisions, confirm that they are on a like for like basis.
Controls differ by listing, not by framework: the Sarbanes-Oxley requirements for internal control over financial reporting apply to companies registered with the SEC, whether they report under IFRS or US GAAP. See Sarbanes-Oxley: Internal Controls over Financial Reporting.