What is the difference between U.S. GAAP and IFRS?
One is based more on specific rules (U.S. GAAP), and the other is based more on broad principles (IFRS).
How tall would the authoritative accounting rules stand for IFRS and U.S. GAAP, respectively?
The accounting rules for IFRS are two inches high.
U.S. GAAP has rules that are nine inches high, plus additional supplementary materials from a variety of other sources as well.
Which set of rules allows companies more discretion on what information is placed on the financial statements?
Under IFRS, companies have more discretion in what information is placed on their financial statements than under U.S. GAAP, because IFRS is based on broad principles that allow for management to disclose information more tailored to their needs. U.S. GAAP tends to be more specific as to the required disclosure needed in a specific situation.
What are the required financial statements?
The basic required financial statements for both are the same: the income statement, balance sheet, and statement of cash flows.
However, the financial statements look different quite different when contrasting U.S. GAAP and IFRS.
What does the income statement look like?
The income statement under U.S. GAAP is either a single-step or multiple-step format. Under IFRS, expenses are classified by nature or function. For example, by nature, wages would be classified. By function, descriptions such as manufacturing would be reported. A great deal of leeway is available under IFRS for financial statement issuers. The income statement under both U.S. GAAP and IFRS classifies comprehensive income as part of equity.
What does the balance sheet look like?
On the balance sheet under U.S. GAAP, we usually list current assets first, then go down the asset side in the order of liquidity. Also, we use historical cost for purchases and the recording of long-term assets. Under IFRS, specific items are required to be reported on the balance sheet; regarding U.S. GAAP, this is not a requirement. For IFRS, noncurrent assets are typically listed first, and often at fair value. The term net assets which are total assets - total liabilities, may be placed on the financials as well.
What about the term "reserve?"
The term reserve is common under IFRS. The use of "reserve" is discouraged using U.S. GAAP. Also, many long-term assets can be revaluated to fair value under IFRS, with the increase or decrease going through stockholder equity. For U.S. GAAP purposes, property, plant, and equipment accounts are recorded at historical cost, and when required, written down for impairment. No subsequent write-up to cost is available under U.S. GAAP, but IFRS allows the write-up of impaired assets. This is a major issue with U.S. GAAP users, where historical cost is one of the bedrock concepts of accounting theory.
How is the statement of cash flow accounted for under both methods?
The statement of cash flows is required under both methods. The operating, investing and financing sections are required under both, although the presentation may differ under U.S. GAAP and IFRS. For instance, the disclosure rules for the statement of cash flows are much more detailed under U.S. GAAP than IFRS.
How are cash and receivables accounted for?
Under U.S. GAAP, cash is pretty much the same as under IFRS.
Receivables are reported fairly similarly under U.S. GAAP compared to IFRS. However, there are no standards under IFRS for pledging, assigning, or factoring receivables. This gives the financial statement issuer a great deal of leeway in how this information is presented.
How about fair value accounting?
Fair value is accounted for in about the same manner under both systems. However, there are some complex differences between the two for several different types of financial statement instruments.
What are the differences in the area of inventory accounting?
For inventory purposes, the average method and FIFO method are both allowed for U.S. GAAP. Both methods are required under IFRS. However, LIFO, which is used extensively in the United States, is not allowed under IFRS. This is a significant difference between the two methods. The lower of cost or market rules differ between U.S. GAAP and IFRS. Inventory can be written down under U.S. GAAP to market value, but not revalued upward. Under IFRS, inventory can be written down, but also written up (but only to cost).
How does property, plant, and equipment accounting differ under U.S. GAAP and IFRS?
For purposes of property, plant, and equipment, interest expense is capitalized under both methods. Nonmonetary asset exchanges are accounted for in a similar fashion as well. The same methods of depreciation are allowed for both. Impairment rules are different. Property, plant, and equipment can be written up under the "Revaluation" to fair value method under IFRS. The U.S. uses historical cost, which does not allow write-ups.
Research and development differences
Research and development costs under U.S. GAAP are expensed. However, under IFRS, during the research phase, the R & D is expensed. When an asset becomes technologically feasible, the costs are capitalized under IFRS; under U.S. GAAP, such costs are generally expensed as R & D.
Internally generated intangibles under U.S. GAAP are expensed; under IFRS, in some cases, the items can be capitalized.
What to do about impaired assets?
Impairment tests are required under both U.S. GAAP and IFRS. They do vary in procedure. Impairment losses are written off for purposes of intangibles; reversals are not allowed under U.S. GAAP but are allowable under IFRS.
Intangible assets and goodwill: how are they accounted for on the balance sheet?
Under both methods, the treatment for intangibles and goodwill on a purchase between two parties are similar in nature. Intangibles assets are separated from goodwill. In addition, in-process research and development are recorded as a separate asset.
The accounting for liabilities—are they the same?
For liabilities, both U.S. GAAP and IFRS require that they be classified as current and noncurrent. The definitions of liabilities and debts are closely related as well under both methods.
How do we account for restructuring losses?
Restructuring losses under U.S. GAAP have more rules and regulations than IFRS, which requires the recognition of a loss once a company has committed to a restructuring loss.
Contingencies: What are the differences?
Contingencies under U.S. GAAP from IFRS. IFRS requires a "midpoint" for recognizing a loss, where under U.S. GAAP, the minimum amount of the possible range of outcomes is used.
The Differences in stockholders' equity
Convertible debt is different under IFRS! Under U.S. GAAP, all proceeds of convertible debt are recorded as a long-term debt. Under IFRS, convertible debt is classified as partially debt and equity. The conversion option is recorded as an equity amount.
EPS, a financial ratio of importance!
Earnings per share reporting is similar, but not exact for both. There is movement in this area to converge the differences between both methods. Due to the common use of EPS, don't be surprised if an agreement is reached on this subject in the future.
How are marketable securities accounted for?
Accounting or trading, available-for-sale, and held-to-investment maturities are pretty much the same under both methods. Gains and losses related to available-for-sale securities are reported in comprehensive income under U.S. GAAP and in the equity account under IFRS.
The equity method is known by what other name?
The equity method under U.S. GAAP is called the associate investment under IFRS.
Consolidations and Control
Consolidation rules differ between both methods. In general, however, for consolidation to occur, 50% of the voting stock must be owned by the parent company under U.S. GAAP and IFRS.
Revenue recognition: a complex area
Revenue is recognized the same in most cases under both methods. However, U.S. GAAP has specific rules for recognition of income in many cases; under IFRS, financial statement users have more leeway in applying the concepts of revenue recognition.
The completed contract method is not allowed.
The completed contract method is not allowed under IFRS for long-term construction contracts. U.S. GAAP allows for its use.
Pension accounting differences
For pension plans, the rules are similar. However, there are differences in the areas of reporting for prior service costs, actuarial gains and losses, and other technical areas of defined benefit plans.
For leases, although there are similarities, there are major differences between how each reports its operating and capital leases. U.S. GAAP has extensive rules on what to report; IFRS gives broad discretion to how a company reports its assets on the books. There are discussions currently undergoing in this area regarding convergence of a common position on lease accounting rules.
How to account for errors?
Accounting changes and errors are similar. However, there are some differences. For example, under U.S. GAAP, errors must be disclosed and financial statements restated; under IFRS, this is not absolutely required. Again, there is more discretion on the part of the issuer under IFRS than U.S. GAAP.
The final word
Regarding disclosure, there are many similarities between the two. Also, there exists a number of differences. U.S. GAAP has significant reporting requirements for the financials; IFRS tends to have fewer rules.
When will the United States adopt IFRS? Time will tell.