Not investment advice. Educational reading. See Disclaimer.
L.5 · INTERMEDIATE · 2 MIN
US GAAP vs. IFRS: Key Differences That Move Numbers
Most public companies outside the U.S. report under IFRS, while U.S. companies use GAAP. The two frameworks share conceptual foundations but diverge on rules that can materially change reported figures — making cross-border comparisons treacherous without adjustment.
The three highest-impact differences: LIFO prohibition (inflates IFRS inventory/income), R&D capitalization (deflates IFRS expenses), and impairment reversal rules (IFRS can write values back up).
§ 03Step through
In inflationary environments, a U.S. manufacturer using LIFO reports lower inventory, higher COGS, and lower net income than an identical IFRS competitor using FIFO. Use the LIFO reserve to convert.
FIFO Inventory = LIFO Inventory + LIFO Reserve
Under IFRS, development costs are capitalized once feasibility is demonstrated. An IFRS pharma company shows lower expenses, higher net income, and an intangible asset — for the same R&D that a GAAP company expenses entirely.
Impact
GAAP Company
IFRS Peer (Same R&D)
R&D on P&L
$200M expense
$120M expense (dev costs capitalized)
Intangible Asset
$0
$80M capitalized development
Reported Net Income
Lower
Higher by $80M pre-tax
True Economics
Identical
Identical
§ 04Try it
Pick a U.S. company and a non-U.S. peer in the same industry. In **Fundamentals**, compare R&D as a % of revenue and intangible asset balances.
§ 05Check-in
A U.S. semiconductor company (GAAP, LIFO) shows lower inventory and higher COGS than a Taiwanese peer (IFRS). Both have identical operations. Why?
§ 06Key insight
Before comparing a GAAP company to an IFRS peer, adjust for LIFO/FIFO differences and check for capitalized development costs. Without these adjustments, you’re comparing accounting methods, not businesses.
§ 07Check-in
A company reports under both GAAP and IFRS. Revenue: GAAP $1B, IFRS $1.05B. Why might this happen?
Check your understanding
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Sit with the ideas.
You are comparing a U.S. semiconductor company (GAAP, uses LIFO) to a Taiwanese competitor (IFRS). The U.S. company has lower reported inventory, higher COGS, and lower net income. Both companies have nearly identical operations and pricing. What adjustments should you make for a fair comparison?
