- IFRS and US GAAP agree on most big things, including revenue (IFRS 15 and ASC 606 are almost the same). The differences that matter are in leases, development costs, inventory, impairment, provisions and cash flows.
- The same office lease costs £109.5k in year 1 under IFRS 16 but £100k under US GAAP's operating-lease model, and IFRS EBITDA is £100k higher.
- Development spending that meets IAS 38's criteria is capitalised under IFRS; under US GAAP it's usually expensed straight away, so profit falls sooner.
- IFRS allows some reversals that US GAAP forbids: inventory write-downs and impairments of assets other than goodwill. US GAAP allows LIFO; IFRS doesn't.
Most countries use IFRS Accounting Standards, set by the International Accounting Standards Board (IASB). US companies listed with the SEC use US GAAP, set by the Financial Accounting Standards Board (FASB). Twenty years of joint work brought the two close together, so for revenue, business combinations and most day-to-day accounting the results are similar. But some differences still change the reported numbers, sometimes by a lot. This post covers the ones finance teams meet most, with worked examples. The examples are illustrative and simplified.
Leases: one model or two
Both standards put leases on the balance sheet as a right-of-use asset and a lease liability. The difference is in the profit and loss account. IFRS 16 treats every lease the same way: depreciation of the asset plus interest on the liability, which makes the cost highest in the early years. US GAAP (ASC 842) has two models. A finance lease works like IFRS, but an operating lease, which covers most office leases, has a single straight-line lease cost.
Take the five-year office lease from our IFRS 16 explainer: £100k a year, discounted at 6%. Under IFRS the cost starts at £109.5k and falls to £89.9k. Under US GAAP it's £100k every year. The total over five years is the same, £500k.
The bigger difference is where the cost appears. Under IFRS, depreciation and interest both sit below EBITDA, so EBITDA is £100k a year higher than under US GAAP, where the operating lease cost sits above it. Comparing EBITDA between an IFRS company and a US GAAP company with large leases (retailers, airlines, offices) needs an adjustment for this.
Development costs: asset or expense
Under IAS 38, research is always an expense, but development costs must be capitalised once a project meets strict criteria: it's technically feasible, the company intends and is able to complete and use or sell it, it will bring future economic benefits, and the costs can be measured reliably. The asset is then amortised once it's ready for use. US GAAP (ASC 730) expenses research and development as it's incurred, with exceptions such as some software development costs.
For a company that spends £1.0m on development in year 1, with the product ready for use in year 2 and amortised over four years, the cost lands in different years:
Inventory: LIFO and write-downs
US GAAP allows the last-in, first-out (LIFO) method of valuing inventory; IFRS doesn't. When prices are rising, LIFO gives a higher cost of sales and lower profit (and, in the US, lower tax). Both standards write inventory down when it's worth less than its cost. IFRS reverses the write-down if the value later recovers; US GAAP never does.
Impairment: testing and reversing
IFRS tests an asset in one step, comparing its carrying amount with its recoverable amount (the higher of fair value less costs of disposal, and value in use). US GAAP tests long-lived assets in two steps: first whether the undiscounted future cash flows cover the carrying amount, and only if they don't, a write-down to fair value. IFRS can therefore recognise an impairment earlier. IFRS also reverses impairments (except on goodwill) if conditions improve; US GAAP doesn't allow reversals for assets held and used.
Provisions: when and how much
IFRS recognises a provision when an outflow is more likely than not. US GAAP accrues a loss when it's probable, which in practice is a higher bar. The amount can differ too. For a lawsuit with any outcome between £1m and £3m equally likely, IFRS records the best estimate, the midpoint of £2m; US GAAP, with no amount in the range more likely than another, records the low end, £1m.
Revaluation and cash flows
IFRS lets companies carry property, plant and equipment at a revalued amount (and investment property at fair value); US GAAP keeps them at historical cost. In the cash flow statement, US GAAP sets the categories: interest paid and received, and dividends received, are operating cash flows, and dividends paid are financing. IFRS currently lets companies choose. That changes with IFRS 18, which applies from 1 January 2027: for most companies, interest paid becomes a financing cash flow, and interest and dividends received become investing.
All the main differences
| Topic | IFRS | US GAAP |
|---|---|---|
| Where it's used | Required for listed companies in more than 140 jurisdictions, including the UK, the EU and Australia | US companies listed with the SEC; foreign companies listed in the US can file under IFRS |
| Style | Principles-based, with more judgement | More detailed rules and industry guidance |
| Leases (lessee) | One model: every lease is depreciation plus interest | Two models: finance leases like IFRS; operating leases have one straight-line cost |
| Inventory: LIFO | Not allowed | Allowed |
| Inventory write-downs | Reversed if the value recovers | Never reversed |
| Development costs | Capitalised once strict criteria are met | Expensed as incurred, with exceptions such as some software |
| Impairment reversals | Allowed, except for goodwill | Not allowed for assets held and used |
| Impairment test | One step: carrying amount vs recoverable amount | Two steps for long-lived assets: undiscounted cash flows, then fair value |
| Revaluing property and equipment | Allowed (revaluation model) | Not allowed: historical cost |
| Provisions: when | When an outflow is more likely than not | When a loss is probable, a higher bar in practice |
| Provisions: how much | Best estimate; the midpoint of an even range | The low end of a range with no best estimate |
| Component depreciation | Required for significant parts | Allowed, rarely used |
| Interest and dividends in cash flows | A policy choice today; set categories from 2027 (IFRS 18) | Interest paid and received, and dividends received, are operating; dividends paid are financing |
| Revenue | IFRS 15 | ASC 606, almost the same model |
Each standard has more detail and exceptions than a summary can show, so check the standards or your auditor before relying on any one point.
Make these charts with your own numbers
Finance teams use charts like these to explain differences between standards to boards, investors and lenders, for example when reconciling to a parent company's GAAP or comparing with competitors. Paste your numbers into the grouped bar chart or the horizontal bar chart and download it as an image, video or PowerPoint slide.
Sources and method
- IFRS Foundation: IFRS Accounting Standards
- FASB: Accounting Standards Codification
- IFRS Foundation: IFRS 18 Presentation and Disclosure in Financial Statements
A summary for general readers, not advice, as of October 2026. The lease example is a five-year lease with £100,000 paid at each year end, discounted at 6%, classified as an operating lease under US GAAP. The development example assumes the costs meet the IAS 38 criteria and the asset is amortised in a straight line over four years from year 2. The provision example assumes every outcome in the range is equally likely and none is a better estimate than another.