IFRS VS U.S.

GAAP: the Point Form Revision Version

By Darren Degraaf, CFA, CMA, PRM

 Income Statement:

Under both, the income statement may be presented as:

o A section of a single statement of comprehensive income, or
o A separate statement (showing all revenues and expenses) followed by a statement of
comprehensive income (described later) that begins with net income.
However, under U.S. GAAP, it may also be presented as a separate statement with the components of other
comprehensive income presented in the statement of changes in shareholders’ equity.

 Revenue Recognition:

Under both, revenue is recognized for a sale of goods when:

o The amount of revenue (price) can be measured reliably.

IFRS, revenue is recognized for a sale of goods when:

o Significant risks and rewards of ownership are transferred to the buyer.
o The entity retains no managerial involvement or effective control over the goods sold.
o The amount of revenue can be measured reliably.
o It is probable that the economic benefits from the transaction will flow to the entity.
o Costs incurred or to be incurred for the transaction can be measured reliably.

IFRS also specifies the criteria for recognizing interest, royalties, and dividends. These may be recognized
when it is probable that the economic benefits associated with the transaction will flow to the entity and
that the amount of the revenue can be measured reliably.

U.S. GAAP, revenue is recognized on the income statement when it is “realized or realizable and earned”.
SEC provides specific guidelines to determine when these two conditions are met:
1. There is evidence of an arrangement between the buyer and seller.
2. The product has been delivered or the service has been rendered.
3. The seller is reasonably sure of collecting money.

 Long Term Contracts

if the outcome of the contract can be measured reliably:

Under both IFRS and U.S. GAAP, if the outcome of the contract can be measured reliably, the
percentage of completion revenue recognition method is used.

If the outcome cannot be measured reliably:

U.S. GAAP: Completed-Contract Method. No revenues or costs are recognized on the income
statement until the project is substantially finished. In the meantime, billings and costs are
accumulated on the balance sheet (under a construction-in-progress asset), rather than expensed on
the income statement.
IFRS: Revenue is recognized on the income statement to the extent of costs incurred during the
period. No profits are recognized until all costs have been recovered.
 Important: Under IFRS and U.S. GAAP, if a loss is expected on the contract, the loss must be recognized
immediately, regardless of the revenue recognition method used.

 Installment Sales

IFRS: installment sales are separated into the selling price (discounted present value of installment
payments) and an interest component. Revenue attributable to the sale (selling) price is recognized at the
date of sale, while the interest component is recognized over time.

U.S. GAAP: A sale of real estate is reported at the time of sale using the normal revenue recognition
conditions if the seller:
o Has completed the significant activities in the earnings process, and
o Is either assured of collecting the selling price or able to estimate amounts that will not be collected.

When these two conditions are not fully met, some of the profit must be deferred and one of the
following two methods may be used.

Installment method: This method is used when collectability of revenues cannot be reasonably estimated.
Under this method, profits are recognized as cash is received. The percentage of profit recognized in each
period equals the proportion of total cash received in the period.

Profit for the period=(Cash collected in the period/Selling price)×Total profit

Cost-recovery method: This method is used when collectability of revenues is highly uncertain. Under this
method, profits are recognized only once total cash collections (including principal and interest on any
financing provided to the buyer) exceed total costs. The revenue recognition method under international
standards is similar to the cost recovery method, but the term “cost recovery method” is not used.

 Barter Transactions:

o IFRS: Revenue from barter transactions can be reported on the income statement based on the
fair value of revenues from similar nonbarter transactions with unrelated parties.
o U.S. GAAP: Revenue from barter transactions can be reported on the income statement at fair
value only if the company has a history of making or receiving cash payments for such goods and
services and hence can use its historical experience to determine fair value. Otherwise, revenue
should be reported at the carrying amount of the asset surrendered.

 Gross vs. Net Reporting:

U.S. GAAP, only if the following conditions are met can a company recognize revenue based on gross
reporting:
o The company is the primary obligor under the contract.
o The company bears inventory and credit risk.
o The company can choose its suppliers.
o The company has reasonable latitude to establish price.

 Non-Recurring Items, Non-Operating Items

Extraordinary Items:
o IFRS does not allow any items to be classified as extraordinary.
 o U.S. GAAP defines extraordinary items as being both unusual in nature and infrequent in
occurrence.

Unusual or Infrequent Items: These items are either unusual in nature or infrequent in occurrence. These
go to Gains/Losses on the IS under IFRS and U.S. GAAP.
IFRS requires that income and expense items that are material and/or relevant to the understanding of a
company's financial performance should be disclosed separately. Unusual or infrequent items meet these
criteria.

 Definition of Operating Activities:

IFRS does not define operating activities. Therefore, companies that choose to report operating income or
the results of operating activities need to ensure that such activities would normally be regarded as
operating.
U.S. GAAP defines operating activities as those that generally involve producing and delivering goods and
providing services, and includes all transactions and other events that are not defined as investing or
financing activities.

 Earnings per Share:

Note: Both U.S. GAAP and IFRS require the presentation of EPS (basic EPS and diluted EPS) on the face of
the income statement.

 Definition of Comprehensive Income:

Most revenues, gains, expenses, and losses are reported on the income statement to determine a
company's net income. However, there are certain income and expense items that are excluded from the
income statement; instead these items are reported directly in shareholders’ equity (U.S. GAAP only), or
in a separate statement of comprehensive income (IFRS and U.S. GAAP) as a part of other comprehensive
income.

Total Comprehensive income definition:

IFRS: “The change in equity during a period resulting from transactions and other events, other than
those changes resulting from transactions with owners in their capacity as owners.”

U.S. GAAP: “The change in equity (net assets) of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and distributions to
owners.”

 Balance Sheet Presentations:

Under both: Report format, account format or classified balance sheet format. Only IFRS allows liquidity
based presentation.

 Assets and Liabilities: Current versus Non-Current

 Both IFRS and U.S. GAAP require that assets and liabilities be grouped separately into their current and
non-current portions. Under IFRS, the current/non-current classifications are not required if a liquidity-
based presentation provides more relevant and reliable information.

IFRS allow some liabilities such as trade payables and accruals for employees to be classified as current
liabilities even though they might not be settled within one year.

 Cash and Cash Equivalents:

o Fair value under IFRS equals the amount at which the asset can be exchanged in an arm's length
transaction between willing and informed parties. Under U.S. GAAP, fair value is based on exit
price—the price received to sell an asset.

 Inventories:

o Under IFRS, inventory is reported at the lower of cost and net realizable value (NRV).
o Under U.S. GAAP, inventory is reported at the lower of cost and market. Market value
(under U.S. GAAP) equals the current replacement cost of inventory

 Non-Current Assets:

o IFRS valued using either the cost model or the revaluation model.
o U.S. GAAP only allows the cost model for reporting PP&E.

 Financial Assets:

o IFRS: The “available-for-sale” classification no longer appears in IFRS as of 2010, even though
“IFRS 9: Financial Instruments” will be effective from 2013. However, even though the available-
for-sale category will not exist, IFRS will still permit certain equity investments to be measured at
fair value with any unrealized gains and losses recognized in other comprehensive income. This
classification will be known as financial assets measured at fair value through other
comprehensive income.

Cash flow statements prepared under IFRS and U.S. GAAP differ along the following lines:
o Classification of cash flows: Certain cash flows are classified differently under IFRS and U.S.
GAAP. IFRS offers more flexibility regarding the classification of certain cash flows.
o Presentation format: There is a difference in the presentation requirements for cash flow from
operating activities.

Type IFRS U.S. GAAP

Interest received CFO or CFI CFO
Interest paid CFO or CFF CFO
Dividends received CFO or CFI CFO
Dividends paid CFO or CFF CFF
Bank overdrafts Cash equivalents Not considered part of cash and cash equivalents and
classified as CFF
Taxes paid Generally CFO, but a portion can be CFO
allocated to CFI or CFF if it can be
specifically identified with these categories
Format of statement Direct or indirect; direct is encouraged Direct or indirect; direct is encouraged. A
reconciliation of net income to cash flow from
 operating activities must be provided regardless of
method used
Under IFRS, if the company has classified interest and dividends received as investing activities, they should
be added to CFO to determine FCFF. If dividends paid were deducted from CFO, they should be added back to
CFO to calculate FCFF. Dividends must not be adjusted for taxes as dividends paid are not tax-deductible.

 Cost of Inventories and Inventory Valuation Methods

o IFRS: Allows FIFO, AVCO & Separate Identification

o U.S. GAAP: Allows FIFO, AVCO, LIFO & Separate Identification

 Inventory Adjustments and Evaluation of Inventory Management

Under IFRS, inventory must be stated at the lower of cost or net realizable value (NRV). NRV is the estimated
selling price in the ordinary course of business less the estimated costs necessary to make the sale and
estimated costs to get inventory in condition for sale. If the NRV of inventory falls below the cost recorded on
the balance sheet, inventory must be written down, and a loss must be recognized (as a part of COGS or
separately) on the income statement. A subsequent increase in NRV would require a reversal of the previous
write-down, which would reduce COGS in the period that the increase in value occurs. However, the increase
in value that can be recognized is limited to the total write-down that had previously been recorded.
Effectively, inventory value can never exceed the amount originally recognized.

On the other hand, U.S. GAAP requires the application of the LCM (lower of cost or market (replacement
cost) principle to value inventory. Market value is defined as replacement cost, where replacement cost must
lie within a range of values from NRV minus normal profit margin to NRV. If replacement cost is higher than
NRV, it must be brought down to NRV, and if replacement cost is lower than NRV minus normal profit margin,
it must be brought up to NRV minus normal profit margin. This adjusted replacement cost is then compared
to carrying value (cost) and the lower of the two is used to value inventory. Any write-down reduces the
value of inventory and increases COGS. Further, under U.S. GAAP, reversal of any write-down is prohibited.

 Presentation and Disclosure relating to Inventory:

IFRS requires companies to make the following disclosures relating to inventory:

1. The accounting policies used to value inventory.
2. The cost formula used for inventory valuation.
3. The total carrying value of inventories and the carrying value of different classifications (e.g.,
merchandise, raw materials, work-in-progress, finished goods).
4. The value of inventories carried at fair value less selling costs.
5. Amount of inventory related expenses for the period (cost of sales).
6. The amount of any write-downs recognized during the period.
7. The amount of reversal recognized on any previous write-down.
8. Description of the circumstances that led to the reversal.
9. The carrying amount of inventories pledged as collateral for liabilities.
U.S. GAAP does not permit the reversal of prior year inventory write-downs. U.S. GAAP also requires
disclosure of significant estimates applicable to inventories and of any material amount of income resulting
from the liquidation of LIFO inventory.

 Capitalization of Interest Costs

Under both, Companies must capitalize interest costs associated with financing the acquisition or
construction of an asset that requires a long period of time to ready for its intended use.

Under IFRS, but not U.S. GAAP, income earned from temporarily investing borrowed funds that were
acquired to finance the cost of the asset must be subtracted from interest expense on the borrowed funds to
determine the amount that can be capitalized.

 Treatment of Interest Payments

o Interest payments made prior to completion of construction that are capitalized are classified under
cash flow from investing activities.
o Interest payments that are expensed may be classified as operating or financing cash outflows
under IFRS, and are classified as operating cash outflows under U.S. GAAP.

 Model for Reporting Long-Lived Assets:

The cost model is required under U.S. GAAP and permitted under IFRS. Under this model, the cost of long-
lived tangible assets (except land) and intangible assets with finite useful lives is allocated over their useful
lives and depreciation and amortization expense. Under the cost model, an asset’s carrying value (also called
carrying amount or net book value) equals its historical cost minus accumulated depreciation/amortization
(as long as the asset has not been impaired).

The revaluation model is permitted under IFRS, but not under U.S. GAAP. Under this model, long-lived assets
are reported at fair value (not at historical cost minus accumulated depreciation/amortization).

 Treatment of R&D Costs:

IFRS requires that expenditures on research or during the research phase of an internal project
be expensed rather than capitalized as an intangible asset.

IFRS allows companies to recognize an intangible asset arising from development or the development
phase of an internal project if certain criteria are met, including a demonstration of the technical
feasibility of completing the intangible asset and the intent to use or sell the asset.

Generally speaking, U.S. GAAP requires that R&D costs be expensed when incurred. However, it does
require that certain costs related to software development be capitalized.

The treatment of software development costs under U.S. GAAP is similar to the treatment of all costs of
internally developed intangible assets under IFRS.

 Impairment of Assets:

Both IFRS and U.S. GAAP require companies to write down the carrying amount of impaired assets.
Impairment reversals are permitted under IFRS but not under U.S. GAAP.
Under IFRS, an asset is considered impaired when its carrying amount exceeds its recoverable amount.
The recoverable amount equals the higher of “fair value less costs to sell” and “value in use,” where
value in use refers to the discounted value of future cash flows expected from the asset. The impairment
loss that must be recognized equals the carrying amount minus the recoverable amount.
Under U.S. GAAP, determining whether an asset is impaired is different from measuring the impairment
loss. An asset is considered impaired when its carrying value exceeds the total value of
its undiscounted expected future cash flows (recoverable amount). Once the carrying value is
determined to be no recoverable, the impairment loss is measured as the difference between the
asset’s carrying amount and its fair value (or the discounted value of future cash flows, if fair value is not
known).

 Reversals of Impairments of Long-Lived Assets

Under U.S. GAAP, once an impairment loss is recorded for assets held for use, it cannot be reversed.
However, for assets held-for-sale if the fair value of the asset increases subsequent to impairment
recognition, the loss can be reversed and the asset’s value can be revised upward.
IFRS allows reversal of impairment losses if the value of the asset increases regardless of classification of
the asset. Reversal of a previously recognized impairment charge increases reported profits. Note
that IFRS allows reversals of only impairment losses. It does not allow the value of the asset to be
written up to a value greater than the previous carrying amount even if the new recoverable amount is
greater than the previous carrying value.
 Investment Property:

IFRS defines investment property as property that is owned (or leased under a finance lease) for the
purpose of earning rentals or capital appreciation or both.

Under IFRS, investment property may be valued using the cost model or fair value model.

U.S. GAAP does not specifically define investment property. It does not distinguish between investment
property and other types of long-lived assets. U.S. companies that hold investment-type property use
the historical cost model.

 Leasing:

Under U.S. GAAP: To classify as a capital lease, it must meet any of the following criteria:
1. The lease term is greater than 75% of the asset’s useful economic life.
2. The present value of the lease payments at inception exceeds 90% of the fair value of the leased
asset.
3. The lease transfers ownership of the asset to the lessee at the end of the term.
4. A bargain purchase option exists.
If none of these conditions hold, the lessee may treat the lease as an operating lease.
Under IFRS, classification of a lease depends on whether all the risks and rewards of ownership are
transferred to the lessee. If they are, the lease is classified as a finance lease; and if they are not, the
lease is classified as an operating lease.
 Lease Disclosures:

o U.S. GAAP, lease disclosures require a company to disclose its lease obligations for each of the
next 5 years under all operating and finance leases. Further, lease obligations for all subsequent
years must be aggregated and disclosed. These disclosures allow analysts to evaluate the extent
of off-balance-sheet financing used by the company. They can also be used to determine the
 effects on the financial statements if all the operating leases were capitalized and brought “on
to” the balance sheet.

o IFRS, companies are required to:

o Present finance lease obligations as a part of debt on the balance sheet.

o Disclose the amount of total debt attributable to obligations under finance leases.
o Present information about all lease obligations (operating and finance leases). Future
payments for the first year must be disclosed, aggregated for years 2 through 5, and
aggregated for all subsequent years.

 Income Taxes:

Unused Tax Losses and Tax Credits

o Under IFRS, unused tax losses and credits may only be recognized to the extent of probable
future taxable income against which these can be applied. On the other hand,
o U.S. GAAP, deferred tax assets are recognized in full and then reduced through a valuation
allowance if they are unlikely to be realized. A company that has a history of tax losses may be
unlikely to earn taxable profits in the future against which it can apply deferred tax assets.

 Bonds Payable:

o IFRS requires effective interest method,

o U.S. GAAP allows effective or straight-line method.

IFRS: Debt issuance related costs like printing/legal/other are included in the measurement of the
liability on the B/S.
U.S. GAAP: Companies usually capitalize these costs and write them off over the bond’s term.

IFRS & U.S. GAAP: Cash outflows related to bond issuance costs are usually netted against bond
proceeds and reported as financing cash flows.
 Pension Obligations:

Changes in net pension asset/liabilities:

o IFRS: There are three general components:
o Employee service costs: The service cost during a period for an employee refers to the
present value of the increase in pension benefit earned by the employee as a result of
providing one more year of service to the company. Service costs also include past
service costs (which reflect changes in the value of the pension obligation due to
employees’ service in past periods when a plan is initiated or when plan amendments
are made). Employee service costs are recognized as pension expense in profit and loss.
o Net interest expense or income: This is calculated as the net pension liability or asset at
the beginning of a period multiplied by the discount rate used to estimate the pension
obligation (present value of expected pension payments). Net interest expense or
income is also recognized as pension expense in profit and loss.
o Remeasurements: Remeasurements include (1) actuarial gains and losses and (2) the
actual return on plan assets less any return included in net interest expense or income.
o Actuarial gains and losses arise when changes are made in any of the
assumptions used to estimate the company’s pension obligation (e.g., mortality
rates, life expectancy, rate of compensation increase, and retirement age).
o The actual return on plan assets (which are invested in a wide variety of asset
classes including equity instruments) typically differs from the amount included
in net interest expense or income (which is usually calculated based on just the
high‐quality corporate bond yield).

Note that premeasurements are not amortized into profit and loss over time; instead they are
recognized in other comprehensive income.

o U.S. GAAP: There are five general components:

o Employee service costs for the period: These are recognized in profit and loss in the
period incurred.
o Interest expense accrued on the beginning pension obligation: Interest costs are added
to pension expense because the company does not pay out service costs earned by the
employee over the year until her retirement. The company owes these benefits to the
employee, so interest accrues on the amount of benefits outstanding. Interest expense
is also recognized in profit and loss for the period.
o Expected return on plan assets: This reduces the amount of pension expense
recognized in profit and loss for the period.
o Past service costs: These are recognized in other comprehensive income in the period
during which they are incurred, and are subsequently amortized into pension expense
over the future service period of employees covered by the plan.
o Actuarial gains and losses: These are also recognized in other comprehensive income in
the period in which they occur and amortized into pension expense over time.