The main differences between GAAP and IFRS, are mainly that IFRS has wider rules and less specific guidance which gives more room to interpretation of the financial statements. Because the IFRS incorporates the value of judgement by the accountant, it tends to be less detailed, more flexible and more informative. Show
The differences between GAAP and IFRS have been analysed in terms of their financial statement presentation, technicalities, and their importance for users of financial statements. 1. The statement of financial positionThe changes in the layout of the statement of financial position as it is more concise and less detailed compared to the layout of the statement of the financial statement prepared under GAAP. An example for this can be the layout of the financial statements. US GAAP requires its public companies to follow Regulation S-X where it specifically shows the detailed list of elements to be included in the financial statements. However, IFRS also requires what to include in the financial statements, but it is far less detailed than the US GAAP. Moreover, the guidance on offsetting of assets and liabilities can be indicated as another difference, thus, US GAAP gives limited guidance on offsetting of assets and liabilities whereas IFRS gives specific guidance. And another difference is the exclusion of long term debt being refinanced under GAAP whereas under IFRS, the exclusion of long term debt from current liabilities. And the similarities is the same components of financial statements under both IFRS and GAAP as both financial standards require to have balance sheet, income statement, cash flow and the accompanying notes to the financial statements. 2. Financial periods requiredFirstly, US GAAP requires the last two years of balance sheet to be presented, and other statements are required to be for the last 3 years. However, IFRS only requires the last period of balance sheet to be presented alongside with the recent one for comparison purposes. Another significance of the IFRS and US GAAP difference is the nature of simplicity of IFRS. IFRS tends to be less detailed, thus, requires less information. 3. Accounting for revenue recognitionAnother important factor which leads to differences between two reporting standards is the recognition of revenues as treated differently by both. The main differences under two reporting standards are that, GAAP generally amortizes revenue over service period, but no up-front recognition however, IFRS has the possibility for up-front revenue recognition when the performance has occurred. This is a major factor that leads to differing balances in the statement of financial position. And a specific example may relate to a construction contract, where it says that it is recognized on the basis of increasing proportion of contract being done. And this example, made under IFRS, makes IFRS fairer than the GAAP. 4. Differences in cash flow statementsThere are major differences in cash flow statements between GAAP and IFRS reporting standards. Under the old GAAP reporting standards the movement of cash needed to be reported in cash flow statement and there were no concept of “cash equivalents”. However, new IFRS reporting standards adopt the notion of “cash equivalents” and define them as cash in hand and deposits which are payable on demand. Moreover, unlike GAAP reporting standards which required cash flows to be reported in nine sections, IFRS requires only operating, investing and financing sections for the cash flow to be reported. Importantly, international differences in reporting standards may never be eliminated due to the following reasons:
5. Differences in Inventory ManagementDifferences between IFRS and GAAP can also be seen in order of inventory. US GAAP uses LIFO method which assumes that goods purchased most recently are normally sold first than the remaining which were purchased earlier. However, this is not allowed under IFRS. Moreover, companies using LIFO tend to pay less tax because LIFO shows lower gross profit, therefore, companies applying IFRS will have a sharp rise in the tax expenses, which can be seen as a disadvantage for the companies.
This blog post was created as a part of the CFA exam review series to help you in your level 1 exam revision, whether done regularly or shortly before your CFA exam.  In this post, we discuss some basic differences between IFRS and U.S. GAAP regarding cash flow statement. Generally speaking, U.S. GAAP is more strict with respect to classifying different items into different cash flows. Interested in other differences between IFRS and U.S. GAAP? Level 1 & Level 2 $14 Handy E-Book IFRS vs US GAAP Have a look at the table: As you can see, IFRS are less restrictive. Both interest received and dividends received can be classified as operating or investing activities. U.S. GAAP allow to classify them as operating activities only. Under IFRS, interest paid and dividend paid are classified either as an operating or as a financing activity. On the other hand, according to U.S. GAAP, interest paid is an operating activity and dividend paid is a financing activity. Have a look also at taxes paid. U.S. GAAP always classify them as operating activities, but under IFRS a portion of tax expense can be allocated to investing or financing activities if it can be directly assigned there. You should also know that under IFRS bank overdrafts are part of cash equivalents. However, under U.S. GAAP, bank overdrafts are not cash or cash equivalents and are included in financing activities. Interested in other differences between IFRS and U.S. GAAP? Level 1 & Level 2 $14 Handy E-Book IFRS vs US GAAP LAST UPDATE: 1 April 2022
US GAAP and IFRS are the two predominant accounting standards used by public companies, but there are differences in financial reporting guidelines to be aware of. In order to present a fair depiction of the business conducted, publicly-traded companies are required to follow specific accounting guidelines when reporting their performance in financial filings. For publicly-traded companies in the US, these rules are created and overseen by the Financial Accounting Standards Board (FASB) and referred to as US Generally Accepted Accounting Principles (US GAAP). On the other hand, the International Accounting Standards Board (IASB) created and oversees the International Financial Reporting Standards (IFRS), which is followed by more than 144 countries. US GAAP vs. IFRS ConvergenceAlthough we have seen moderate convergence of US GAAP and IFRS in the past, the likelihood of a single set of international standards being adopted in the near term remains very low. Global Reporting Data (Source) US GAAP vs. IFRS Cheat Sheet [PDF]We have compiled a single cheat sheet to outline the key differences between US GAAP and IFRS. You can download the complete US GAAP vs IFRS Cheat Sheet below. Global TrendsGiven the statistics above, it is clear why it is important to understand the differences between US GAAP and IFRS. More specifically, there are two developing trends to be aware of:
Blue Areas Represent Areas where IFRS is Required for Domestic Public Companies (Source: IFRS) Differences between US GAAP vs IFRSGenerally, IFRS is described as more principles-based whereas US GAAP is described as more rules-based. While there are examples to support these descriptions, there are also meaningful exceptions that make this distinction not very helpful. The following discussion highlights specific differences between the two sets of standards that may be useful to users of financial statements. There are four main areas where the two diverge in financial reporting:
US GAAP vs. IFRS: Financial Statement PresentationThe following differences outlined in this section affect what financial information is presented, how it is presented, and where it is presented. Income StatementUS GAAP requires presenting three periods, compared to two for IFRS. However, many companies following IFRS choose to report three periods. Balance SheetUS GAAP lists assets in decreasing order of liquidity (i.e. current assets before non-current assets), whereas IFRS reports assets in increasing order of liquidity (i.e. non-current assets before current assets). Volkswagen Group (IFRS) vs. Ford Motor Co. (US GAAP) Balance Sheet Comparison The Statement of Cash FlowsUS GAAP requires that interest expense, interest income and dividend income be accounted for in the operating activities section, and dividends paid be reported in the financing section. However, IFRS provides greater discretion with respect to which section of the Statement of Cash Flows these items can be reported in. Quarterly/Interim ReportsUS GAAP considers each quarterly report as an integral part of the fiscal year, and a Management’s Discussion and Analysis section (MD&A) is required. In contrast, IFRS considers each interim report as a standalone period, and while an MD&A is allowed, it is not required. Non-Standardized MetricsBoth US GAAP and IFRS allow different types of non-standardized metrics (e.g. non-GAAP or non-IFRS measures of earnings), but only US GAAP prohibits the use of these directly on the face of the financial statements.
Under GAAP, companies are allowed to supplement their earning report with non-GAAP measures. The most commonly used example is earnings before interest, taxes, depreciation and amortization (EBITDA), a non-GAAP measure that includes adjustments for non-cash items such as depreciation and non-recurring, one-time expenses to more accurately represent the “true” performance of the business. However, adjusted EBITDA will be included in a separate reconciliation section rather than directly showing up on the actual income statement. US GAAP vs IFRS: Recognition of Accounting ElementsWhether a company reports under US GAAP vs IFRS can also affect whether or not an item is recognized as an asset, liability, revenue, or expense, as well as how certain items are classified. Research and Development (R&D) CostsUS GAAP requires that all R&D is expensed, with specific exceptions for capitalized software costs and motion picture development. While IFRS also expenses research costs, IFRS allows the capitalization of development costs as long as certain criteria are met. Capitalizing Development Costs under IFRS (Airbus, 2019) Expensing R&D under US GAAP (Boeing, 2019) Capitalizing Development Costs under US GAAP (Netflix, 2019) Contingent LiabilitiesReferred to as ‘Provisions’ under IFRS, contingent liabilities refer to liabilities for which the likelihood and amount of the settlement are contingent upon a future and unresolved event. Examples include a liability associated with a pending lawsuit or a liability associated with the company’s future cost of fixing a product under warranty. When comparing US GAAP and IFRS, differences in the definition of the word “probable” and the measurement techniques used can lead to differences in both the recognition and amount of Contingent Liabilities. IFRS has a lower threshold for recognition as its definition of probable is > 50%, while US GAAP generally considers a contingent liability probable only when the likelihood is >75%. US GAAP and IFRS also differ with respect to the amount of the liability that is recognized. IFRS generally uses the expected value in its measurement of the amount of the liability recognized, while the amount under US GAAP depends on the distribution of potential outcomes. As such, the same scenario can lead to differences in the recognition, measurement and even disclosure of contingent liabilities if the company was reporting under US GAAP or IFRS. Income TaxesUnder US GAAP, all deferred tax assets (DTAs) are recognized and netted out/offset with a valuation allowance when it is more likely than not (>50%) that the company will not be able to use the DTA. But for IFRS, DTAs are only recognized as assets when probable (>50%), so there is no need for valuation allowances. Investment PropertyFor US GAAP, all property is included in the general category of Property, Plant and Equipment (PP&E). Under IFRS, when the property is held for rental income or capital appreciation the property is separated from PP&E as Investment Property. Biological AssetsUnder US GAAP, harvestable plants are included in inventory while production animals are included in PP&E. On the other hand, living animals and plants that can be transformed or harvested are considered biological assets and are measured at their fair value until they can be harvested under IFRS. US GAAP vs IFRS: Measurement of Accounting ElementsReporting differences with respect to the process and amount by which we value an item on the financial statements also applies to inventory, fixed assets and intangible assets. InventoryUnder US GAAP, both Last-In-First-Out (LIFO) and First-In-First-Out (FIFO) cost methods are allowed. However, LIFO is not permitted under IFRS because LIFO generally does not represent the physical flow of goods. The table below shows the impact of this difference on other metrics and should be useful when using these metrics across US GAAP and IFRS: Fixed AssetsBoth accounting standards recognize fixed assets when purchased, but their valuation can differ over time. US GAAP requires that fixed assets are measured at their initial cost; their value can decrease via depreciation or impairments, but it cannot increase. IFRS allows companies to elect fair value treatment of fixed assets, meaning their reported value can increase or decrease as their fair value changes. In addition, IFRS requires separate depreciation processes for separable components of PP&E. US GAAP allows but does not require such cost segregations. Intangible AssetsSimilar to fixed assets, under US GAAP, intangible assets must be reported at cost. Under IFRS, companies can elect fair value treatment, meaning asset values can increase or decrease depending on changes in their fair value. US GAAP vs IFRS: Disclosures and TerminologyTo conclude our section on how US GAAP and IFRS differ, another area of variance is the information required to be disclosed within the footnotes of the financial statements, as well as the terminology frequently found in filings. DisclosuresUS GAAP and IFRS can differ in the specifics and level of detail required. Footnotes are essential sources of additional company-specific information on the choices and estimates companies make and when discretion is exerted, and thus useful to all users of financial statements.
A classic example of revenue recognition manipulation that we discussed in our Accounting Crash Course was software-maker Transaction Systems Architects (TSAI). Up until 1998, TSAI had employed conservative revenue recognition practices and only recorded revenues from agreements when the customers were billed through the course of the 5-year agreement. But once sales began to decline, TSAI changed its revenue recognition practices to record approximately 5 years’ worth of revenues upfront. This was eventually exposed in 2020, in which TSAI’s revenue from software license fees saw an immediate 16.1% fall post-adoption of SOP 97-2. Below is the disclosure in TSAI’s 2020 10-K that explained its sudden decrease in software revenue. Later in 2002, KPMG replaced Arthur Andersen as TSAI’s auditor and upon restating its financials – TSAI’s 1999 to 2001 cumulative revenue was reduced by $145mm due to the improper recognition of revenue related to its software licensing arrangements. US GAAP vs IFRS TerminologyUS GAAP and IFRS show differences in terminology as noted in the following examples:
Similarities Between US GAAP and IFRSDespite the many differences, there are meaningful similarities as evidenced in recent accounting rule changes by both US GAAP and IFRS. Revenue Recognition (ASC 606 and IFRS 15)The Revenue Recognition Standard, effective 2018, was a joint project between the FASB and IASB with near-complete convergence. It provided a broad conceptual framework using a five-step process for considering contracts with customers and recognizing revenue. The updated standard helped ensure that the accounting guidelines would better match the underlying economics of new business models and products.
The traditional business model in the automotive industry has gradually begun to shift from one-time purchases to continuous post-sale revenue. This movement to get existing customers to pay more to unlock embedded features has been led by automaker Tesla, whose vehicles come with different tiers of connectivity and features based on the paid subscription service plan (e.g. Standard Connectivity, Premium Connectivity, Acceleration Boost). In effect, this facilitates the standardization and comparability of revenue recognition across different businesses and industries. Leases (ASC 842 and IFRS 16)The Lease Standards, effective 2019, requires that leases greater than 12 months are reported on Balance Sheets as Right of Use Assets under both US GAAP and IFRS. US GAAP distinguishes between Operating and Finance Leases (both are recognized on the Balance Sheet), while IFRS does not. The important difference from this change, that companies with leases may see a material increase in non-current assets and the corresponding debt obligations on their balance sheets, is relevant for both US GAAP and IFRS. Leases under US GAAP (Kroger, 2019) vs. Leases under IFRS (Tesco, 2019) Debt Issuance Costs (ASU 2015-03)Under US GAAP prior to 2015, debt issuance costs were capitalized as an asset on the Balance Sheet. In 2015, US GAAP effectively matched IFRS’s treatment of netting these costs against the amount of outstanding debt, similar to debt discounts. This leads to the debt being recognized on the Balance Sheet as a liability (the net amount outstanding) not both an asset (the capitalized issuance cost) and a liability (the outstanding principal). For more information, see US GAAP’s Accounting Standard Update in 2015. For a deeper dive into the distinctions between US GAAP and IFRS, please see our Financial Reporting Differences in a Global Economy Course. |
What are some of the differences between US GAAP and IFRS in the presentation of the statement of cash flows?
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