IFRS v. GAAP: Principal Differences

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1 IFRS v. GAAP: Principal Differences General Theory Principles v. Rules Financial Statement Format Income Statement: Similar Balance Sheet: Varied Asset Listing Cash Flows: Same, but some classification differences: interest income, expense, and dividend income Other Major Differences LIFO not permitted in IFRS PPE Revalued each year, impairments reverse

2 Principal Differences (cont.) Contingent liabilities use mid-point for recognition under IFRS Completed contract method not permitted under IFRS Leases, no definitive ranges to distinguish operating and capital leases Lower of cost or market valuation requires exit value, not replacement cost, under IFRS R&D, capitalize development costs under IFRS

3 Detailed Comparison: GAAP and IFRS Basis of Accounting 1. Both use modified historical cost basis of accounting, but with growing emphasis on fair-value measurements 2. IFRS moved to fair-value earlier and more deliberately than GAAP 3. Both require significant disclosures of valuation methodology, with IFRS doing so in the financial statement itself

4 Financial Statement Components 1. Same financial statements required, with GAAP permitting combined statement of income and comprehensive income, or in statement of changes in equity, unlike IFRS 2. SEC registrants required to show two balance sheets comparatively, and three of all other; IFRS requires only two years of each statement

5 Consolidation 1. Consolidation based on control, including de facto control, unlike GAAP 2. Same fiscal year required unless impracticable under IFRS; GAAP permits three-month difference with no practicability issue 3. IFRS requires same principal accounting methods in all consolidated companies

6 Business Combinations (Converged) 1. Value acquired company at FMV, rejecting both pooling-of-interests and purchase method accounting 2. Difference between FMV of consideration given and assets and liabilities acquired is either goodwill, or a gain recognized immediately after the acquisition

7 Balance Sheet 1. Unlike GAAP, classified balance sheet is required in most cases under IFRS 2. SEC registrants balance sheet format is defined carefully, unlike IFRS 3. Common to see IFRS balance sheet that is classified in reverse order of liquidity

8 Property, Plant, and Equipment 1. Estimates of useful life and salvage required to be evaluated annually under IFRS, unlike GAAP 2. IFRS requires component accounting 3. Revaluation to FMV permitted if revaluations can be made reliably, and only if all items in same class are revalued

9 Intangible Assets 1. Generally the same, except that intangibles may not be revalued under GAAP, unlike IFRS; 2. IFRS permits development costs to be capitalized and amortized, whereas GAAP requires both research and development costs to be expensed; and 3. IFRS expenses all promotional costs

10 Equity-Method Investments 1. Both require the use of the equity method for significant investees, but GAAP permits fair value option 2. IFRS permits proportional consolidation of jointly-controlled entities, unlike GAAP 3. Consistent accounting methods required for significant investees or jointlycontrolled entities under IFRS

11 Inventories 1. Valued at lower of cost or net realizable value under IFRS, rather than LCM under GAAP 2. LIFO not permitted under IFRS 3. Same cost formula required for all inventories of similar nature under IFRS 4. Inventory write-downs reversible under IFRS, unlike GAAP

12 Equity and Liabilities 1. IFRS requires instruments with both debt and equity characteristics to be split and accounted for as both, unlike GAAP 2. While the characteristics of debt and equity are evaluated under the same terms, under GAAP a settlement obligation in equity of the issuer is not treated as debt

13 Contingencies (provisions) 1. Standard for recognition is probable under GAAP, whereas more likely than not under IFRS 2. Provisions are discounted if the effect is material, unlike GAAP 3. Onerous contracts are required to be accounted for as a provision, unlike under GAAP

14 Income Taxes 1. Generally very similar treatment of income tax expense and deferred items, except IFRS requires all deferred tax assets and liabilities to be classified as non-current, unlike GAAP

15 Income Statement 1. IFRS does not define format 2. IFRS does not permit the recognition of extraordinary items, whereas GAAP permits items unusual in character and infrequent in occurrence to be reported segregated from other items

16 Revenue (Converged Exposure Drafts) 1. Core principle Revenue is recognized when it is earned through the transfer of goods or services to a customer in the amount expected to be received from a customer 2. As a result, the percentage of completion method of recognizing revenues on longterm contracts is likely gone, whereas the alternative was not permitted before under IFRS and not preferred under GAAP

17 Revenue (cont.) 1. A single contract with separate elements must be divided into separate units to be accounted for 2. As an issue, collectibility would primarily affect the amount to be recognized, rather than when it is recognized

18 Leases (Converged Proposal) 1. Lessee in all leases must recognize an asset equal to the fair value of the rights, and a liability equal to the fair value of the obligation. Present value of payments may be used to value these. 2. Lessor must recognize a lease receivable and a performance obligation 3. Revenue is recognized over the term of the lease none at lease inception