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A Comparison of IFRS and US GAAP
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An illustration of the differences most commonly found in practice
Finally it's here!
A very significant step has been taken by Securities and Exchange Commission (SEC) towards allowing US companies to adopt a set of accounting and financial reporting standards - the International Financial Reporting System (IFRS).
The mandate is out: The change should come into effect in 2014.
This will seal the dominance for the popular IFRS, which is already the standard benchmark for the European Union. The principles-based IFRS is rapidly winning favor in other parts of the world as well.
According to SEC roadmap, 2011 is the date when the move to IFRS will be confirmed or discarded. So, in 2011, the government can decide against the move to international standards, or change its timetable for reform, if IFRS does not get changed to its liking.
However, to most experts, the change from GAAP to IFRS is inevitable. So this most certainly signals the end of an era - the end of US accounting profession's near 75-year relationship with US GAAP.
No doubt, this is the age where guys-with-the-bucks are looking for a common global language to enable them to make true comparisons. So it is fair that time has come for the U.S. GAAP to move on.
As GAAP prepares for the curtain call and the final bow, companies are coming to terms with some basic outcomes. And rightly so: every company knows that compliance will produce its headaches, no doubt, and the other difficulties that US firms face in the convergence must not be underestimated.
TA brings you some similarities and some differences between the 2 accounting bodies. As with most new relationships, a gradual getting-to-know-each-other period will make for a stronger long-term relationship and TA wishes to help you getting started. Here is our comparison of IFRS and GAAP.
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Philosophical Differences
One of the glaring differences between the two accounting schools is the sheer volume. While IFRS currently boasts approximately 2,000 pages of accounting regulations, GAAP comprises over 2,000 separate pronouncements. Many of these pronouncements are several hundred pages long, issued in various forms and formats by numerous bodies.
The second glaring difference is that GAAP is more rules-based approach whereas the underlying approach of IFRS is principles-based. To take a simple example, IFRS approach would make you tell your daughter to return home at a reasonable hour (principles based) but GAAP would make you tell her to be home at 9 p.m. and then providing for the 15 contingencies that might justify a different time (rules based).
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Physical Differences
The differences are not restricted to a philosophical level. There are many physical differences as well.
- Anyone using IFRS statements quickly realizes that while IFRS requires a balance sheet and an income statement contain certain minimum information, IFRS does not mandate a precise format for the display of that information.
- IFRS allows an entity to reverse inventory write-downs in select situations, whereas U.S. GAAP does not. IFRS also requires the recognition of certain development costs that U.S. GAAP accounting does not recognize. In valuing inventory under IFRS, LIFO is prohibited.
- In addition, assets appearing on an entity's books are also under impact. IFRS requires an entity to expense pre-operating and pre-opening costs and costs incurred in startup, training, advertising, moving and relocation. Any of those assets on a U.S. GAAP balance sheet would disappear in financial statements based on IFRS.
- Capitalization of borrowing costs for qualifying assets is mandated in the U.S. GAAP whereas IFRS permits an entity to elect whether to capitalize or expense borrowing costs for qualified assets. However, the entity must guarantee that it is consistent in its approach.
- IFRS guidance regarding revenue recognition is less extensive than U.S. GAAP. This is highly reflective of the IFRS. U.S. GAAP does not have specific guidance for software revenue recognition.
- IFRS prohibits reporting items as extraordinary while U.S. GAAP permits reporting items as extraordinary in the income statement, albeit under very limited circumstances.
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Conclusion
As you see it is not just a philosophical difference between a rules-based approach and a principles-based approach that marks the differences between the two systems. The systems differ conceptually on a number of points and can significantly affect an entity's reported results.
Although there are inherent differences in both accounting schools the scope of the differences is constantly shrinking because of ongoing convergence projects. For instance, FASB's recent Statement no. 159, The Fair Value Option for Financial Assets and Financial Liabilities provides for a fair value option that the statement's summary calls "similar, but not identical, to the fair value option in IAS 39."
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