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Welcome to the new blog area for IFRS (International Financial Reporting Standard) 

 

IFRS is gaining lot of momentum and there has been overwhelming response to this blog series, especially lot of people wanting to understand IFRS with respect to the SAP products. Before we get there, one of the key thing that I wanted to discuss is the practical differences between US GAAP and IFRS.

  

Before getting into the differences, its important to note that though the U.S. and IFRS do contain differences, the general principles, conceptual framework, and accounting results between them are often the same or similar. Offcourse there are areas of divergence that can come through for many specific transactions or treatment. The approach I would take to discuss the divergence would be more with a practical vs. listing out all of the theoretical differences.

 

One of the primary difference between US GAAP and IFRS is one is a more rule based (US GAAP) whereas the other is more of a principle based approach. Rule based approach makes companies follow rules, though many cases companies try to find out how they can get exceptions to the rules. In a principle based approach the onus is on the Controller and the auditor of the company. Lets take a specific example :

For Leasing, US GAAP says – The lease term is equal to 75% or more of the

estimated economic life….”

Whereas IFRS says – “The lease is for the major part of the economic life

of the asset”, which could be interpreted as 75, 80 or 95% by each company.

 

Lets now cover each of the area separately:

 

1. Financial Statement preparation

 

Area of comparison

US GAAP

IFRS

Financial periods to be covered

Needs to present three years ending on the balance sheet date

Have the current year and the last year comparison numbers

Layout of balance sheet

Public companies need to follow the layout as prescribed in regulation S-X

Does not specify any layout but mentions the minimum set of items to be disclosed

Deferred tax

Deferred tax is classified as current asset or non current asset based on nature of their asset or liability

Deferred tax is classified as non current asset

Extraordinary items

Restricted to items that are both unusual and infrequent. Negative goodwill is always treated as extraordinary.

Prohibited

Exceptional items occurring infrequently e.g. acquisition, discontinuation

Presented as a component of

continuing operations.

Presented in financial statements as part of the main or in notes

Performance measures

SEC prescribes what performance measures can be disclosed. For non GAAP measures, reconciliation to GAAP measure should be made

No prescribed measures, will be presently generally acceptable performance measures that would be relevant

  

2. Consolidations and Business combinations

 

Consolidations of subsidiaries into parent company, is based on control. Both U.S. GAAP and IFRS follow this approach, though differences exist in the consideration/definition of control. Generally, under both GAAPs all subsidiaries subject to the control of the parent company must be consolidated. There are few exceptions in U.S. GAAP for certain specialized industries. Under both US GAAP and IFRS, the consolidated financial statements of the parent and its subsidiaries may have different year closing dates, but should not vary by more than 3 months.

 

Area of comparison

US GAAP

IFRS

Control

Its based on control of financial interests. So the control is based on only the financial share of the subsidiary.

Determined by power to

control, with control being the parent’s ability to govern the financial and operating policies

of an entity to obtain benefits. Control presumed to exist if parent owns greater than

50% of the votes, and potential voting rights must be considered.

Differing financial dates

The effect of significant events between the financial dates should be disclosed

The effect of significant events between the financial dates should be adjusted in the financial statements

Preparation of consolidated financial statement for every parent

Always required

Not required if a parent is a again a wholly owned subsidiary of another company

Minority interest

Shown as a separate item, not clubbed with equity

Shown as part of equity

     

 

In case of business combinations, in  both  US GAAP as well as IFRS, the acquiring entity is the entity  that obtains control, and the cost of the business combination is the fair value of the consideration

transferred plus any acquisition-related transaction costs. Goodwill computations are also similar in both US GAAP and IFRS which is the difference between the investment fair value and the acquiree’s net identified. Further goodwill is subject to an annual impairment test, where the goodwill value is reassessed and adjusted if the value goes down through impairments.

 

Area of comparison

US GAAP

IFRS

Date

Reasonable period of time

before and after the terms

of the acquisition are agreed

to and announced. Otherwise,

acquisition date.

It’s the acquisition date

Negative goodwill

Allocated on a pro rata

basis to reduce the

carrying amount of certain

acquired assets with any

excess recognized as an

extraordinary gain.

After reassessing the

purchase price allocation,

recognized immediately as

income.

Research and development

Determine fair value and

expense immediately if no

alternative future use.

Recognized as a finite life

intangible asset separately

from goodwill if the definition

of an intangible asset is met

and the fair value can be

measured reliably.

Combination of entities

under common control

Accounted for in a manner

similar to a pooling of

interests (historical cost).

Outside scope of IFRS

  

We compared couple of areas in this blog, will continue to discuss the differences in next blog.

 

Check out the earlier parts in this blog series – Global convergence through IFRS – Part I , Global convergence through IFRS – Part II  and Global convergence through IFRS – Part III

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