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Is IFRS That Different From U.S. GAAP?

Remi Forgeas, CPA Insider | June 16, 2008 The U.S. is moving toward IFRS. Unlike what happened with other countries, IASB and FASB have been working on convergence for many years. Are the two standards still very different? For many years, countries developed their own accounting standards. They were rules-based, principle-based, business-oriented, tax-oriented … in one word, they were all different. With globalization, the need to harmonize these standards was not only obvious but necessary. By the end of the ’90s, the two predominant standards were the U.S. GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards). And, both standard setters, IASB (International Accounting Standards Board) and FASB (Financial Accounting Standards Board), initiated a convergence project even before IFRS was actually adopted by many countries. Now, that the U.S. is clearly moving toward IFRS, as re-emphasized by the recent SEC (U.S. Securities and Exchange Commission) proposal, one wonders what the potential impacts of the differences between these two frameworks on the financial statements will be? And how financial executives can anticipate the adoption of IFRS in order to minimize the last-minute adjustments? Historical Reminder In September 1999, the FASB published its second edition of an IASC-U.S. Comparison Project, a comprehensive comparative study of IASC (International Accounting Standards Committee) standards and GAAP. This 500-page report included comparative analyses of each of the IASC's "core standards" to their GAAP counterparts. At that time, conceptually and practically, the differences between the two frameworks were numerous and significant. Since 1999, the FASB has undertaken six initiatives in order for the GAAP to converge with IFRS: 1. Joint projects conducted with the IASB (Conceptual Framework Project, Business Combination Project, Revenue Recognition Project, Financial Statements Presentation), 2. Short-term convergence project, 3. Liaison IASB member on site at FASB offices, 4. FASB monitoring of IASB projects, 5. Convergence Project and 6. Explicit consideration of convergence potential in all Board agenda decision.

S. and the “guessed” professional judgment. However. the review of the facts pattern is more thorough. The SEC is addressing this topic in order to find the right balance between the “educated” professional judgment. The inherent characteristic of a principles-based framework is the potential of different interpretations for similar transactions. However. At the time of the IFRS adoption. In a principle-based accounting system. this led English observers to comment that international standards were really rule-based compared to U. the areas of interpretation or discussion can be clarified by the standards-setting board.S. these examples provide a flavor of impacts on the financial statements and therefore on the conduct of businesses. Differences Between IFRS and U. under US GAAP. extraordinary items are not segregated in the income statement. are both standards still different? Principles Based vs. the research is more focused on the literature whereas under IFRS. whereas IFRS is principle-based.In November 2008. while.K. These two initiatives revealed the importance of international standards and concluded. LIFO (a historical method of recording the value of inventory.S. GAAP. GAAP While this is not a comprehensive list of differences that exist. Under U. environment. SEC issued its proposed roadmap to the adoption of IFRS for public companies. IFRS include positions and guidance that can easily be considered as sets of rules instead of sets of principles. GAAP is rule-based. This situation implies second-guessing and creates uncertainty and requires extensive disclosures in the financial statements. The difference between these two approaches is on the methodology to assess an accounting treatment. GAAP that were much more principle-based. GAAP prefers a risks-andrewards model. about 30 years of convergence between the two standard setters. and provide fewer exceptions than a rules-based system. Statement of Income — Under IFRS. Rules Based One of the major differences lies in the conceptual approach: U. Once the convergence effort is acknowledged and its results identified.S. This proposal came about one year after the ending of the reconciliation to GAAP for foreign registrants that issue IFRS financial statements. Some entities consolidated in accordance with FIN 46(R) may have to be shown separately under IFRS. a firm records the last units purchased as the first units sold) cannot be used . that is acceptable. to a certain extent. • • • Consolidation — IFRS favors a control model whereas U. they are shown below the net income. Inventory — Under IFRS. the professional judgment is not a new concept in the U.S.

S. especially when linked to business performances. the earning-per-share calculation does not average the individual interim period calculations. As a first step.S. such as SFAS 141(R) on business combinations or SFAS 160 on the accounting for non-controlling interest. • How to Anticipate the Transition? Companies have a tendency to focus their attention on the accounting and financial statements impacts of the transition to IFRS. For example. which will face potential impact on how contracts are written or how the information is gathered and maintained. but going forward. and Human Resources. while it is considered as “expenses” under U. whereas under U.e. your company will have to define procedures to enable the gathering and review of costs related to development that may be capitalized. in some cases. GAAP. When will changes have to be looked at? Long-term transactions should be looked at with the “IFRS lenses. the transition phase has to be segregated from the going-forward application of IFRS. What will be the impact on management reporting and IT? The transition to IFRS will imply a change in management reporting and. especially those that are aimed to converge with IFRS.S. as will Operations. less cost). it should review the potential IFRS accounting in order to avoid unexpected results at the time of the transition. identification of differences and work only on those) may be effective for the transition (less time. Development costs — These costs can be capitalized under IFRS if certain criteria are met. in the format of data required. GAAP the computation averages the individual interim period incremental shares. . this process has had a much broader impact than expected. Likewise for R&D costs.” If a company intends to enter into a joint-venture agreement. However. Some of the questions to consider before the start of the project are: What will be the consequences on your company or organization? The Finance department will obviously have to update its processes. Companies can leverage on the convergence process by implementing new pronouncements as soon as possible. which will have to review the compensation packages. A reconciliation approach (i. • Earning-per-Share — Under IFRS. this approach may create a lot of unexpected difficulties.while under U. companies have the choice between LIFO and FIFO (is a common method for recording the value of inventory). since the tools will not be in place. GAAP. systems will have to be upgraded in order to gather information on liquidity risks in accordance with IFRS 7 — Financial Instruments — Disclosures.

companies can learn from the mistakes of its European predecessors. even before the actual transition. * The views expressed in this article are the author’s own . especially in Europe. since European countries were the first ones to make the transition.S.When should the IFRS training begin? Due to the broad impact of the transition. your company should put in place a scalable training plan on IFRS not limited to the accounting department. U. they were unable to leverage lessons learned from predecessors in the transition process and most of the time local accounting standards were not converging to IFRS. show that the process is more complex and lengthier than anticipated. Final Thought Experiences in other countries. However.

an organization of accountants. GAAP is used principally in the United States. financial analysts. although most conform to one main system or the other as they work to keep their markets modern. you can make a better evaluation of numbers from companies that follow neither system. often pronounced as fazzbee). All accounting systems follow double-entry practices that categorize transactions as revenue or expenses.Comparing U. GAAP and IFRS Accounting Systems By Ann C. Every time some new issue comes up. and regulators who draw up accounting practices to meet ongoing changes in the markets. The idea isn’t to make earnings look pretty so much as to help investors understand what average capital spending or average taxation should be. the system used in the European Union and many other countries. assets or liabilities.S. MBA from Emerging Markets For Dummies If you’re investing in emerging markets. The two primary accounting systems have a few differences between them that may affect the results.S. Logue. Many countries have their own accounting systems. the FASB studies the problem. but they’re key to understanding the business and its financial statements.S. develops a proposed accounting procedure. you need to know about the world’s two main accounting systems: Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). companies are required to disclose information about their accounting choices and their expenses in the footnotes. U. they fluctuate from quarter to quarter and from year to year. GAAP. Under U. GAAP GAAP are set by the Financial Accounting Standards Board (FASB. although the Security and Exchange Commission is looking to switch to IFRS by 2015. no matter what a company actually paid. • Disclosure: A company needs to explain its assumptions for different expenses. Capital purchases may be depreciated over several years instead of taken as expenses in the year acquired. The notes aren’t easy to read. All the gory information is in the footnotes to the financial statements. including corporations and analysts. GAAP allow for: • Smooth presentation of earnings: One of the hallmarks of GAAP is an emphasis on smooth earnings results from year to year. and sends it for review and comment to different users of financial statements. The idea is to give investors a sense of normalized results rather than the actual cash in and cash out. . For example. If you understand a little about both GAAP and IFRS. taxes are reported based on statutory rates. Although the results are designed to be smoothed.

do business with. or extend credit to. The philosophy behind IFRS is similar to GAAP. Also. a standard system is an incentive for newly capitalist nations.Comparing GAAP and International Financial Reporting Standards The IFRS were established in 2001 and adopted by the European Union in 2005.S. but there are some key differences. GAAP Balance sheet Income statement Statement of comprehensive income Changes in equity Cash flow statement Footnotes Recommends separation of current and noncurrent assets and liabilities Included with assets and liabilities Documents included in the financial statements Balance sheet Deferred taxes Minority interests (usually ownership positions by significant but not majority investors) Extraordinary items (events that don’t occur on a regular basis) Bank overdrafts Included in liabilities as a separate line item Prohibited Allowed if they’re unusual and infrequent May be included in cash Charged as a financing if used in cash activity management . as shown in the following table: Differences between IFRS and U. The hope is that all the world’s businesses will move to these standards to help investors and financiers all over the world better understand the financial situation of companies they invest in. to develop accounting that meets world standards. especially China.S. GAAP Issue IFRS Balance sheet Income statement Changes in equity Cash flow statement Footnotes Requires separation of current and noncurrent assets and liabilities Shown as separate line items on the balance sheet Included in equity as a separate line item U.

Few of these differences are likely to cause major changes in any company’s reported results. which is an event that doesn’t occur on a regular basis such as a merger or a corporate restructuring. . someone looking at the financial statements would be able to make the adjustment easily. a company with great results under GAAP won’t look terrible under IFRS. And because extraordinary items are disclosed. unless it got those results with an extraordinary item.