Financial Statements

Accounting Principles

FASB and IASB Frameworks

The standards of accounting are set by two organizations: the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB). These groups share some commonalities but vary in terms of their scope and jurisdiction.

Each country adopts a given set of accounting rules. The International Accounting Standards Board (IASB) is the most popular standard-setting body, with approximately 100 countries conforming to its accounting rules. Some countries, such as the United States, choose to develop their own accounting rules. In the United States, the Financial Accounting Standards Board (FASB) promulgates accounting rules.

The Financial Accounting Standards Board (FASB), a not-for-profit organization established in 1973, develops, establishes, and communicates rules and practices for financial accounting and reporting, most notably generally accepted accounting principles, in the United States. U.S. generally accepted accounting principles (GAAP) is a combination of accounting rules, standards, and procedures that govern the preparation of financial statements in the United States. GAAP is the accounting standard used in the United States, while IFRS is the accounting standard used in over 110 countries around the world. In addition to the United States, many other countries, including France, Canada, and Germany, use GAAP, but not all of the principles are used in commonality by each country. For example, U.S. GAAP allows for three common methods for inventory accountability: weighted-average cost method, first in, first out (FIFO), and last in, first out (LIFO). However, French GAAP does not allow for LIFO or weighted average and must use FIFO which may impact a company’s cost of goods sold which will impact their net income.

The FASB is a private, non-profit organization standard-setting body whose primary purpose, in the public’s interest, is to establish and improve GAAP within the United States. The FASB is responsible for providing consistent accounting standards, establishing guidelines, and delivering swift issue resolution. It acknowledges that expecting all companies to use accounting principles in precisely the same way is unrealistic. Accordingly, the FASB affords flexibility for companies within different sectors to employ different approaches that best suit their operations. However, to ensure transparency to stakeholders, the FASB obligates businesses to use footnotes in financial statements and, within the management discussion and analysis (MD&A) of the statements, to clarify the specific accounting principles in use.

The International Accounting Standards Board (IASB) is an independent body that develops a single set of globally accepted accounting guidelines, through procedures that permit thorough, timely, and transparent study of financial accounting and reporting issues. The IASB was established in 2001 as a replacement for the International Accounting Standards Committee, which was founded in 1973, and is responsible for creating and promoting the international accounting standards. The IASB is headquartered in London and consists of members with accounting backgrounds in professional and academic settings. The majority of companies outside of the United States follow the accounting standards set by the IASB. The IASB is a not-for-profit organization with a mission of creating superior, comprehensible, and executable accounting and reporting standards for the public's interest.

FASB and IASB Framework

Year Established 1973 2001
Jurisdiction United States European Union
Latin America
Approximately 100 nations outside the United States
Mission Continually improve financial accounting and reporting to investors Create superior accounting and reporting standards for the public good
Accounting Standards GAAP IFRS
Scope Revenue recognition
Consistency of financial statements
Financial reporting
Cash flow measurement
Revenue recognition
Consistency of financial statements
Financial reporting
Cash flow measurement

The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) were established to create accounting and recording practices for the public good.


The accounting standards that are likely to be used, depending on the country, will be a domestic set of generally accepted accounting principles (GAAP), or international financial reporting standards (IFRS).

GAAP is a combination of authoritative standards, set by policy boards, and the commonly accepted ways of recording and reporting accounting information. GAAP improves the clarity of the communication of financial information and is governed by the Financial Accounting Standards Board (FASB). U.S. generally accepted accounting principles (GAAP) refers to the combination of accounting rules, standards, and procedures that govern the preparation of financial statements in the United States as established by the FASB. GAAP combines enforceable standards and conventionally recognized practices of documenting and reporting accounting information.

The intention of GAAP is to provide a certain amount of uniformity to financial statements. This helps facilitate coherent communication of a company's financials for investors. For example, for Jake's Home Decor Shop to remain compliant, or to stay in accordance with federal laws and regulations, any financial statement circulated outside of the company must adhere to the rules, standards, and procedures established by GAAP. Materials subject to GAAP compliance include categorization of items on the balance sheet, evaluation of outstanding shares, and revenue recognition. Revenue recognition is the principle on which the adjusting process is based; the aim is to record income in the accounting period in which it is earned regardless of when the cash is actually received.

Many companies outside of the United States use international financial reporting standards. International financial reporting standards (IFRS) are high-quality, understandable, enforceable, and globally accepted guidelines based on clearly articulated principles established by the IASB. The IASB, or the International Accounting Standards Board, is the independent body that develops a single set of globally accepted accounting guidelines. IFRS participants include numerous nations. For example, European Union nations, several African nations, many Latin American nations, and many Asian nations follow IFRS principles. In Europe, IFRS standards are required for domestic public companies in countries such as Germany, France, Spain, Poland, Austria, and Belgium. African countries that require the same IFRS standards include Nigeria, Chad, Congo, Kenya, and Tanzania. Latin American countries that require IFRS standards for domestic public companies include Mexico, Brazil, Argentina, Chile, Jamaica, and the Dominican Republic. Asian countries that follow these guidelines include the Philippines, Cambodia, Malaysia, and South Korea. It is advantageous for countries that participate in international commerce and investment to adopt IFRS, as IFRS was created to form a consistent language for accounting to enable the flow of business information between companies and countries.

GAAP and IFRS differ in the requirements for various accounting activities. One example of differing requirements of accounting activities is in acceptance of "last in, first out" (LIFO) as a valuation method for inventory. The LIFO inventory method is based on the assumption that units purchased more recently are to be sold first. U.S. GAAP allows LIFO, while IFRS does not. The biggest difference between IFRS and U.S. GAAP is how each approaches accounting, with U.S. GAAP focused on a more formal literature approach and IFRS more concerned with thoroughly reviewing the facts.

GAAP and IFRS Treatments of Accounting Activity

Inventories LIFO valuation is prohibited LIFO valuation is allowed
Buildings, property and equipment, and intangible assets Regular revaluations of assets are required when revaluation option is chosen
  • Uses historical cost
  • Reevaluations not permitted
Asset impairments
  • Impairment assessed using discounted cash flows
  • Reversal of impairment losses sometimes allowed
  • Impairment assessed using undiscounted cash flows
  • Reversal of impairment losses not allowed
Restructuring allowances Recognition is allowed if formal plan has been adopted and implementation initiated Losses are not recognized unless a liability has been incurred and no changes to plan will occur
Convertible debt Amounts are split between debt and equity Usually recognized as a liability
Classification of deferred taxes Noncurrent Current or noncurrent based on underlying asset or liability
Revenue recognition Occurs when risks and rewards of control have been transferred Similar to IFRS in principle, but numerous specific rules for specific types of transactions and industries
Purchase in-process research May be capitalized and amortized Valued and immediately expensed
Definition of a discontinued operation Generally restricted to operating units Less restrictive than IFRS
Comparative prior financial statements At least one prior year comparison is required
  • No requirement for private companies
  • SEC requires comparative statements
Accounting policies of parent and subsidiaries Conformity is required No conformity is required

Requirements for GAAP and IFRS differ for various accounting activities. For inventory, with IFRS, LIFO valuation is prohibited, though the reverse is true for GAAP, as LIFO valuation is allowed.