How does International Accounting Differ from US Accounting?

international accountingAny United States (U.S.) business that operates in the global economy should understand the differences between U.S. and international accounting practices. Businesses throughout the world have the same need to account for their assets, liabilities, revenues and expenditures so that potential investors, creditors and other stakeholders can accurately assess the financial health of the organization. However, these businesses often perform accounting activities in different ways because they use their own unique set of accounting standards. U.S. businesses follow the Generally Accepted Accounting Principles (GAAP), and other countries have their own accounting principles that usually accept input from a body of global accounting standards. Here are some background details about both sets of accounting standards, some examples of the current differences between the two of them and information about the goal to merge the accounting standards into a global accounting system.

Background on International and U.S. Accounting Standards

The U.S. set of GAAP was birthed out of necessity following the infamous stock market crash of 1929. A professional organization called the American Institute of Accountants sought more transparency over the financial record keeping of companies by introducing five broad principles of accounting that eventually evolved into GAAP over the years. The Financial Accounting Standards Board (FASB) currently maintains and updates U.S. GAAP. As the world became more interconnected mainly through trade agreements, the International Accounting Standards Committee (IASC) was founded in the early 1970s in the United Kingdom. This committee which is now the IAS Board (IASB) creates the current global accounting standards.

Key Differences Between the Accounting Standards

A significant difference between the U.S. GAAP and the IAS is how each accounts for leased purchases. The U.S. GAAP allows companies to either capitalize or expense these purchases depending on the GAAP capitalization criteria. Companies look better to investors if they can capitalize these purchases because the purchases add to their recorded assets and are not counted as expenses. If a leased purchase provides measurable future economic value, then it can be classified as an asset that can be capitalized according to U.S. GAAP. The IAS’s take on lease purchases opts to closely investigate the facts surrounding the lease to determine if it is a candidate for capitalization or if it is simply an expense.

Another contrast seen between the two standards is how they account for the monetary fluctuations caused by inflation and deflation. The U.S. GAAP does not account for these fluctuations, but the IAS uses an index to adjust their numbers to account for inflation or deflation. The two standards also differ in how they define the tax basis for determining deferred tax assets and liabilities.

Convergence Strategy For Accounting Standards

Both the Norwalk Act of 2002 and a Memorandum of Understanding (MOU) between the IASB and the FASB in 2006 have established ground rules for the eventual convergence of U.S. GAAP and IAS . The groups have been actively working towards this objective since 2003. Their latest agenda items include merging standards relating to insurance contracts, leases and the recording of financial instruments.


Although there are still some differences between the U.S. GAAP and the ones set forth by the IAS in London, the two organizations are striving to extract the best tenets of each set of accounting principles to create improved global accounting standards. This type of merger of international accounting and U.S. GAAP standards serves to strengthen the global economy in the long term.