in Differences Accounting Applications between the US GAAP and IFRS
This table below identifies major differences in accounting applications between the US GAAP and IFRS. Topics are selected from the syllabus of the undergraduate core course Intermediate Accounting I (ACG 4101). A number of text books and other sources are used to develop this table. This main objective of this table is to facilitate students understanding about the differential applications of accounting processes under IFRS compared to the US GAAP that are predominantly covered in the undergraduate accounting syllabus. The idea is to provide students with incremental learning on the IFRS without compromising the existing coverage of the financial accounting topics in the Intermediate Accounting I syllabus. Topics Rules-Based vs. Objectives-Oriented General Discussion FASB uses a rulesbased approach; IASB uses an objectives-oriented approach. US GAAP Rules-Based: following a list of rules when choosing the appropriate accounting treatment for a transaction. The FASB is actively considering whether to move towards objective-oriented standard setting. IFRS Objectives-Oriented: It is also widely known as "principlebased" approach. This approach stresses using professional judgment rather than a list of rules.
Balance Sheet presentation: US GAAP vs. IFRS
There are more similarities than differences in balance sheets prepared according to US GAAP and those prepared applying IFRS
No requirement for minimum list of items to be presented. Some US companies use the statement of financial position as well.
Specifies a minimum list of assets and liabilities to be presented in the balance sheet. IAS No.1 changed title of balance sheet to Statement of Financial Position, although companies are not required to use title.
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General Discussion
US GAAP Current assets and liabilities are reported before noncurrent assets and liabilities.
IFRS Although no specific format is prescribed, the balance sheets prepared under IFRS often report non-current items first.
Segment Reporting: FASB ASC 280-10-5020 vs. IFRS No. 8.
The only difference between the two reporting standards in segment reporting is IFRS requires one additional disclosure. More similarities than differences between the two reporting standards.
Requires companies to report information about reported segment profit/loss, including certain revenues/expenses including reported segment profit/loss, segment assets, and the basis of measurement. No minimum requirements for reporting.
Requires that companies also disclose total liabilities of its reportable segments.
Income Statement presentation: US GAAP vs. IFRS
Certain minimum information to be reported in the face of the income statement. Headings and subtotals shall be presented on the face of the income statement when such presentation is relevant to an understanding of the entity's financial performance. Allows expenses to be classified by either function or by natural
SEC regulations require that expenses be classified by
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General Discussion
US GAAP function. Bottom line of Income Statement is called either net income/ net loss. Reports "extraordinary items" separately.
IFRS description. Bottom line of Income statement is called either profit or loss.
Prohibit reporting "extraordinary items."
Discontinued operation: difference in definition of component (FASB Staff position 144-d 2009, recent initiative to change (ED)
What constitutes as "component" of an entity differed significantly between the two reporting standards.
A component of an entity is one whose operations and cash flows can be clearly distinguished from the rest of the entity that has either been disposed of or classified as held for sale.
A component of an entity: Primarily either a major line of business or geographical area of operations, and Part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations, or Subsidiary acquired exclusively with a view to resale and the disposal involves loss of control
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Topics Extraordinary items: IAS 1 as amended
General Discussion GAAP uses separate reporting whereas IFRS does not report extraordinary items at all.
US GAAP Provides for the separate reporting, as an extraordinary item, of a material gain or loss that is unusual in nature and infrequent in occurrence.
IFRS Neither the income statement nor any notes may contain any items called "extraordinary."
Comprehensive Income presentation
Revised the standard to bring international reporting of OCI largely in line with US standards.
Allows the reporting of OCI in the statement of shareholders' equity, besides other two reporting options: a) a single statement of comprehensive income or b) in a separate income statement followed by a statement of comprehensive income.
IFRS provides two reporting options for OCI items: a) a single statement of comprehensive income or b) in a separate income statement followed by a statement of comprehensive income.
Prohibits reevaluation of PPE and Intangible assets.
IFRS permits companies to use revaluation option for PPE and intangible assets. If revaluation option is chosen and if fair value is greater than book value, then "changes in revaluation surplus" is reported as other comprehensive income items, A revaluation surplus account in equity is accumulated.
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Topics Classification of cash flow items
General Discussion Both require a statement of cash flows.
US GAAP Designates cash outflows for interest payments and cash inflows from interest and dividends received as operating cash flows. Dividends paid to shareholders are classified as financing cash flows.
IFRS Allows more flexibility. Can report interest and dividends paid as either operating or financing cash flows, and interest and dividends as either operating or investing cash flows. Interest and dividends are usually reported as financing activities. Interest and dividends received are classified as investing.
Revenue recognition concepts and standards: recent joint initiatives by the FASB and IASB; IAS No. 18
Similar to US GAAP, IFRS defines revenue as "the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increase in equity, other than increases relating to
US GAAP has more industry-specific revenue recognition guidance than IFRS.
Allows revenue to be recognized when following conditions are met: (a) The amount of revenue/costs associated with the transaction can be measured reliably. (b) It is probable the economic benefits associated with the transaction will flow to the seller. (c) The seller has transferred to the buyer the risks/rewards of ownership, and does not
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General Discussion contributions from equity participants.
US GAAP
IFRS effectively manage or control the goods (d) The stage of completion can be measured reliably.
Long Term Construction Contract: IAS No 11
Same rules apply when reliable estimates can be made but differ when reliable estimates cannot be made.
When reliable estimates cannot be made, completed contract method is used.
Requires the use of the cost recovery method rather than the completed contract method when reliable estimates cannot be made. Requires the use of the percentage of completion method when reliable estimates can be made. Allocations of total revenue to individual components are based on fair value, with no requirements to focus on Vender Specific Objective Evidence (VSOE).
Requires the percentage of completion methods when reliable estimates can be made.
Multiple-Deliverable Arrangements IAS No.18
IRFS contains very little guidance about multiple deliverable arrangements.
A company records revenue around the same time that it delivers the product or service. A company estimates the separate selling price for each deliverable based on Vender Specific Objective Evidence (VSOE) of fair values. If VOSE doesn't exist, revenue recognition is deferred until VOSE is available or until all elements
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Topics How cash and cash equivalents are treated: off-setting bank overdrafts with cash balance. IAS No.7
General Discussion In general cash and cash equivalents are treated similarly under both reporting standards
US GAAP are delivered. Overdrafts should be treated as liabilities.
IFRS
Allows banks overdrafts to be offset against other cash accounts when overdrafts are payable on demand and fluctuate between positive and negative amounts as part of the normal cash management program that a company uses to minimize their cash balance. IFRS also Allow fair value option for accounts receivable, but restricts circumstances in which fair value option is allowed. IAS 39 permits accounting for receivable as "available for sale" investments if that option is elected upon initial recognition of receivables. IFRS 9 prohibits that option (effective from January 2013). Does not have requirements of disaggregation
Accounts Receivables and notes receivables: disclosures and fairvalue options. IFRS No. 9
IAS No.39 was the original standard that specified appropriate accounting for accounts and notes receivables. Both the IFRS standards are very similar to U.S GAAP with respect to accounts receivable. Both allow a fair value option for accounting for receivables with a few exceptions.
Allow fair value option for accounts receivable
Only allow "available for sale" accounting for investments in securities.
Requires more disaggregation of accounts and notes receivable in the balance sheet or notes
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General Discussion
US GAAP
IFRS
Transfer of receivables: conceptual basis for accounting choice and applications
IAS No.39 and FASB ASC 860 cover financing with receivables with IFRS and US. GAAP. International and US guidance often lead to similar accounting treatment, however, where the IFRS and U.S GAAP most differ is in the conceptual basis for their choice of accounting approaches and in the decision process they require to determine which approach to use.
Sales treatment occurs when effective control has been surrendered over the financial assets. Control has been surrendered only if certain specific criteria have been met: The transferred financial assets are legally isolated from the transfer or
Sale - Substantially all the risk and rewards of ownership is transferred. Secured borrowing- retention of all the risk and rewards of ownership after transfer. If neither of the above holds, the company accounts for the transaction as a sale if it has transferred control, and as a secure borrowing if it has retained control.
Each transferee (or, if the transferee is a securitization entity, each holder of its beneficial interests ), has the right to pledge or exchange the transferred financial assets or (or beneficial interests) The transferor does not maintain effective control over the transferred financial assets or beneficial interests (e.g., through a call option or repurchase agreement)
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Topics Use of LIFO IAS No.2
General Discussion Accounting for inventory under US. GAAP or IFRS are both based on the principle that the primary base of accounting for inventory is cost. There still exist a few differences between both methods. Both US. GAAP and IAS standards require inventory to be valued at the lower at cost. There are still a few differences accounting for reversals, realizable value and writedowns.
US GAAP LIFO is an acceptable method. Consistent cost formula for all inventories similar in nature is explicitly not required.
IFRS LIFO is prohibited. Same cost formula must be applied to all inventories similar in nature or use to the entity.
LCM determination difference, and inventory write-down and reversal: IAS 2
Inventory is carried at the lower of cost are market. Market is defined as current replacement cost as long as market is not greater than net realizable value (NRV) and is not less than net realizable value reduced by a normal sales margin. Any write-downs of inventory to the lower of costs or market create a new costs basis that subsequently cannot be reversed.
Inventory is carried at the lower of cost are net realizable value. Designated market value under IFRS is always NRV.
Previously recognized impairment losses are reversed, up to the amount of the original impairment loss when the reason for the impairment no longer exists.
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Topics R&D expense: Splitting research vs. development expenditure. IAS No.38
General Discussion US GAAP requires all R&D cost to be expensed in the period incurred. IAS expense research costs in the period incurred and capitalize development cost.
US GAAP Research & Development costs are expensed in the period incurred.
IFRS Development costs are capitalized when an entity can demonstrate all of the following: a) The technical feasibility of completing the intangible asset so that it will be available for use or sale. b) Its intention to complete the intangible asset and use or sell it. c) Its ability to use or sell the intangible asset. d) How the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset. e) The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset. f) Its ability to measure reliably the expenditure attributable to the intangible asset during its development.
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Topics Software development costs
General Discussion The IFRS does not require the GAAP approach to amortize computer software development costs.
US GAAP The percentage we use to amortize computer software development costs is the greater of: The ratio of current revenues to current and anticipated expenses The straight-line percentage over the useful life of the software.
IFRS This approach is allowed, but not required.
Component Depreciation IAS No.16
Under GAAP component depreciation is not required, yet under IFRS it is required.
Component depreciation is allowed but not often used in practice. No requirement of annual residual value review.
Each component of an item of PP&E must be depreciated separately if its cost is significant in relation to the total cost of the item. Requires a review of residual value at least annually.
Fair-value option and revaluation of PPE IAS No.16
Under US GAAP, companies report PP&E in their
Prohibits revaluation
Revaluation is a permitted accounting policy election for an entire class of assets, requiring
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Topics
General Discussion balance sheet at cost less accumulated depreciation. IAS allows a company to report PP&E at cost or fair value, however, if the company chooses to report at FV all assets within a class of PP&E must be revalued on a regular basis.
US GAAP
IFRS revaluation to fair value
Revaluation of Biological Assets
GAAP uses Book Value, as IFRS allows for revaluation of biological assets and
Timber Tract and Fruit orchard are valued at cost less accumulated depreciation.
Valued at their fair value less estimated costs to sell.
Valuation of Intangible Assets IAS No.38
GAAP does not allow for revaluation, yet IFRS does, if can be traced to an active market.
Prohibits revaluation of any intangible asset.
IAS No.38 allows a company to value an intangible asset subsequent to initial valuation at: 1. Cost less accumulated depreciation 2. Fair Value, if fair value can
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General Discussion
US GAAP
IFRS be determined by reference to an active market. If revaluation is chosen, all assets within that class of intangibles must be revalued on a regular basis.
Impairment of PPE and Finite-Life Intangible Assets IAS No.36
Both US GAAP and IAS contains similarly defined impairment indicators for assessing the impairment of longlived assets, however, there are important differences in accounting for impairment of value for PP&E between US GAAP and IAS.
When to test and method of determining impairment: When events or changes in circumstances indicate that book value may not be recoverable. A two-step approach requires a recoverability test to be performed first. If it is determined that the asset is beyond recovery then an impairment test must be performed. Recoverability: An impairment loss is required for the amount by which the
When to test and method of determining impairment: Assets must be assessed for indicators of impairment at the end of each reporting period. A one-step approach requires that impairment testing be performed if impairment indicators exist. Indicators of impairment are similar to US. GAAP.
Recoverability: An impairment loss is required when an asset's book value exceeds the
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General Discussion
US GAAP carrying amount of the asset exceeds its fair value or undiscounted sum of the assist's estimated future cash flows. Measurement: The impairment loss is the difference between book value and fair value. Reversal of loss: Prohibited for all assets to be held and used.
IFRS recoverable amount. (higher of the asset's value-in use (present value of estimated future cash flows) and fair value less cost to sell. ) Measurement: The amount by which the carrying value of the asset exceeds it recoverable amount. Reversal of loss: If the circumstances that caused the impairment are resolved, if appropriate, loss may be reversed up to the newly estimated recoverable amount, not to exceed the initial carrying amount adjusted for depreciation.
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Topics Impairment of Goodwill IAS No.36
General Discussion Differences between GAAP and IFRS in the level of testing and measurement for the impairment of goodwill.
US GAAP Level of Testing: Reporting unit-A segment of an operating segment for which discrete financial information is available.
IFRS Level of Testing: Cash-generating unit (CGU)-the smallest identifiable group of assets that generates cash flows that are largely independent of the cash flows from other assets. A CGU can't be lower than the segment. Measurement:
Measurement: 2 Step Process 1. Compare the fair value of the reporting unit with its book value. A loss is indicated if fair value is less than book value. 2. The impairment loss is the excess of book value over implied fair value. 1 Step Process Compare the recoverable amount of the CGU to book value. If the recoverable amount is less, reduce the goodwill first, then other assets. (See Impairment of PP&E for recoverable amount definition)
Costs of Defending Intangible Rights
Under GAAP litigation costs are capitalized and amortize, and under IFRS these costs are expensed.
Litigation costs to successfully defend an intangible right are capitalized and amortized over the remaining useful life of the related intangible.
Litigation costs are expensed, except in rare situations when expenditure increases future benefits.
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Topics Accounting for investments: (IFRS No. 9)
General Discussion IAS No. 39 was the standard that specifies appropriate When investors accounting for lack significant investments under influence; IFRS. A new standard IFRS No. 9 was issued November 12, 2009 that will be required after January 1, 2013. IFRS No. 9 eliminates the AFS and HTM classifications pushing more investments into being accounted for at Fair Value through Profit & Loss (FVTPL), thus having unrealized gains and losses included into net income. Transfer between categories Until recently, IFRS did not allow transfers out of "FVTPL"
US GAAP Allows for specialized accounting Held-to-maturity (HTM), Available-for-sale (AFS), Trading securities (TS) used to categorize securities.
IFRS Does not allow for specialized accounting HTM & AFS are not allowed. Either classified as FVTPL and Fair Value through Other Comprehensive Income (FVTOCI).
Allow for transfers between TS, HTM & AFS
Generally do not allow transfer of debt investments to HTM & AFS (only rare circumstances)
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General Discussion classification. As a response to the current financial crisis, the IASB decided to amend No. 39 to allow for such transfers but only under very rare circumstances such as our recent financial crisis.
US GAAP
IFRS
Fair Value Option IAS No.9
IFRS accounting standards are more restrictive for determining when firms are allowed to elect the fair value option.
Specific circumstances do not have to exist for election of fair value.
Can elect the fair value option only in specific circumstances. (i.e. avoid an "accounting mismatch")
Cost Method
Use of cost method is less prevalent under IFRS than under U.S. GAAP
Initial investment is recorded at cost and subsequently adjusted to fair value if fair value is readily determinable
Under IAS No.39, equity investments are typically measured at fair value, even if they are not listed on an exchange or over-the-counter market. Cost method only used, if fair value cannot be measured reliably (occurs when the range of reasonable fair value
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General Discussion
US GAAP
IFRS estimates is significant and the probability of various estimates within the range cannot be reasonably estimated).
Equity method
Both the US GAAP and IAS require the use of the equity method for the investors with significant influence. The IAS application of the equity method requires that the accounting policies of investees be adjusted to correspond to those of the investor. The IAS also allows investors to account for a joint venture using either the equity method or "proportionate consolidation"
Equity method of accounting
Equity method accounting (joint venture and "proportionate consolidation") If separate financial statement is presented, subsidiaries and associates can be accounted for at either cost or fair value.
For those equity method investments for which management does not elect to use the fair value option, the equity method of accounting is required Uniform accounting policies between investors and investees are not required
Uniform accounting policies between investors and investees are required
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Note: Proposed presentation format for Income statement and Statement of Cash Flows The FASB and IASB are working together on a project, Financial Statement Presentation, to establish a common standard for presenting information financial statements. Following are the proposed format: Organizing the elements of the balance sheet, statement of comprehensive income, and the statement of cash flows into a common set of classifications. Operating and investing activities activities will be included within a new category, "business activities." Three additional groupings: discontinued operations, income taxes, and equity (if needed). Direct method is mandatory Eliminate concept of cash equivalents in favor of cash only.
Cash flows will be classified based on how related assets and liabilities are used by management. (i.e. expenditures of PP&E would likely be classified as operating)
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