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What are some of the key differences between IFRS and U.S. GAAP?

SEC has mandated the convergence of US GAAP and IFRS-GAAP. Proponents of the reporting standards state that the major difference between US GAAP vs. International GAAP is the latters concern with fewer details. As a result, issues have been r aised about the effects of their convergence.The Effects of US GAAP vs. IFRS GAAP Differences and its Convergence Standards (1) Where US GAAP upholds SECs 3-year comparative financial statement presentation, IFRS requires only 1-year presentation of comparative financial information. (2) US GAAP requires that the changes in equity should be presented by showing a statement of comprehensive income, which may be done as part of the income statement, or as a separate Statement of Comprehensive Income or as Statement of Changes in Equity. By comprehensive income, it means that the net income or net loss should be presented as an item that increases or decreases the equity balance. In international financial reporting standards, only the presentation of Statement of Changes in Equity is required, wherein comprehensive income presentation is not mandatory. Net income or net loss can be directly added or deducted to or from the equity, without the necessity of presenting the income or loss for the year. (3) Refinanced loans if completed before the date of financial statement issuance is presented as a non-current liability by US GAAP standards, while IFRS considers refinanced loans as non-current if the transaction is completed before the balance sheet date. (4) US GAAP allows the costs of spoilage and idle capacity in inventory while IFRS does not. (5) US GAAP allows the use of LIFO while IFRS does not permit this inventory costing method. (6) Write-downs or the reduction of inventory value due to significant overvaluation, if compared to current market value, can be reversed in IFRS accounting if certain criteria are met. US GAAP simply prohibits the reversal of any write-downs. (7) US GAAP implements the Completed Contract method, if percentage of completion cannot be applied in construction contracts. As opposed to IFRS accounting, wherein the cost recovery method is used. (8) US GAAP distinguishes deferred tax on asset or liability as current or non-current based on the asset or liability for which the tax has been deferred, while IFRS recognizes deferred taxes as always current. (9) US GAAP requires historical costs as bases for the book values of property, plant and equipment while IFRS allows revalued amount aside from historical cost. Revalued amount is one where the fair value of the asset will be reduced by subsequent depreciation and impairment costs. (10) US GAAP recognizes as expenses the major costs of overhauling or repairing assets, while IFRS accounting treats major cost of repairs as additional or capitalized value of the asset for which the repairs were made. (11) US GAAP does not allow recognition of gains or losses in the disposition of non-current assets, while IFRS GAAP recognizes gains or losses in said transactions. (12) US GAAP requires a more detailed disclosure of lease maturities, while IFRS GAAP entails fewer details for its disclosure. (13) US GAAP does not impose any limitations in the recognition of pension assets, while IFRS GAAP limits the value of pension assets to the net value of unrecognized cost of past services and actuarial costs including the current value of benefits derived from refunds, or any reduction of future contributions to the plan. (14) US GAAP requires capitalization of interests costs on borrowing only, as against IFRS accounting which allows capitalization of all borrowing costs in relation to its asset. (15) US GAAP accounting allows equity method in assigning valuation on investments in subsidiaries, while IFRS accounting mandates either cost method or IAS 39, but does not allow the equity method. The above differences between US GAAP vs. International GAAP represent only a few of the accounting and reporting standards being resolved by the FASB and the IASB. Based on these examples, users and issuers of financial statements, whether engaged in international trade or not, will have an idea of the changes to expect in relation to their respective businesses. Some Examples of Differences Between IFRS and U.S. GAAP

Consolidation IFRS favors a control model whereas GAAP prefers a risks-and-rewards model. Some entities consolidated in accordance with FIN 46(R) may have to be shown separately under IFRS.

Statement of Income Under IFRS, extraordinary items are not segregated in the income statement. With GAAP, they are shown below the net income. Inventory Under IFRS, LIFO cannot be used, but GAAP, companies have the choice between LIFO and FIFO. Earning-per-Share Under IFRS, the earning-per-share calculation does not average the individual interim period calculations, whereas under GAAP the computation averages the individual interim period incremental shares. Development costs These costs can be capitalized under IFRS if certain criteria are met, while it is considered as expenses under U.S. GAAP.

Comparing U.S. GAAP and IFRS Accounting Systems

If youre investing in emerging markets, you need to know about the worlds two main accounting systems: Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). GAAP is used principally in the United States, although the Security and ExchangeCommission is looking to switch to IFRS by 2015, the system used in the European Union and many other countries. Many countries have their own accounting systems, although most conform to one main system or the other as they work to keep their markets modern. All accounting systems follow double-entry practices that categorize transactions as revenue or expenses, assets or liabilities. The two primary accounting systems have a few differences between them that may affect the results. If you understand a little about both GAAP and IFRS, you can make a better evaluation of numbers from companies that follow neither system.

GAAP are set by the Financial Accounting Standards Board (FASB, often pronounced as fazz-bee), an organization of accountants, financial analysts, and regulators who draw up accounting practices to meet ongoing changes in the markets. Every time some new issue comes up, the FASB studies the problem, develops a proposed accounting procedure, and sends it for review and comment to different users of 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. The idea is to give investors a sense of normalized results rather than the actual cash in and cash out. For example, taxes are reported based on statutory rates, no matter what a company actually paid. Capital purchases may be depreciated over several years instead of taken as expenses in the year acquired. Although the results are designed to be smoothed, they fluctuate from quarter to quarter and from year to year. The idea isnt to make earnings look pretty so much as to help investors understand what average capital spending or average taxation should be.

Disclosure: A company needs to explain its assumptions for different expenses. All the gory information is in the footnotes to the financial statements. Under U.S. GAAP, companies are required to disclose information about their accounting choices and their expenses in the footnotes. The notes arent easy to read, but theyre key to understanding the business and its financial statements.

Differences between IFRS and U.S. GAAP

Issue Documents included in the financial statements Balance sheet Income statement Changes in equity Cash flow statement Footnotes IFRS Balance sheet Income statement Statement of comprehensive income Changes in equity Cash flow statement Footnotes Balance sheet Requires separation of current and Recommends separation of current and U.S. GAAP

noncurrent assets and liabilities Deferred taxes Shown as separate line items on the balance sheet Minority interests (usually ownership positions by significant but not majority investors) Extraordinary items (events that dont occur on a regular basis) Bank overdrafts May be included in cash if used in cash management Included in equity as a separate line item Prohibited

noncurrent assets and liabilities Included with assets and liabilities

Included in liabilities as a separate line item Allowed if theyre unusual and infrequent

Charged as a financing activity

IFRS The IFRS conceptual framework is an attempt to determine nature and purpose of accounting. The conceptual framework provides assumption and principles that underlie financial reporting. The purpose of IFRS is to provide information to determine how a particular transaction should be accounted. Historical evidence indicates that in absence of conceptual framework, some accounting standard were in conflict with accounting principle of prudence and accrual, many standards were internally inconsistent and few standards were not consistent with other accounting standard. In many cases, the standard setting was based on individual concept of each participant of standard setting board. This led to development of rule based accounting, which is regarded as prescriptive and inflexible. So, to ensu re that principle based standard is developed, a detailed conceptual framework must be laid down (ACCA, 2011). Further, the conceptual framework would provide consistent accounting pronouncement over time.

About the International Accounting Standards Board

The International Accounting Standards Board is responsible for setting up, promoting and developing the standards set up by the International Financial Reporting Standards board. The organization's mission is to set accounting standards that best serve the public interest and create internationally-acceptable guidelines for financial statement reporting.


The International Accounting Standards Board was launched in 2001 to replace the International Accounting Standards Committee (IASC). The Board is responsible for developing, implementing and monitoring the application of nationally and internationally-approved accounting standards and working with the International Accounting Standards Committee Foundation to shape the future of accounting.


The IASB is comprised of 14 Board members who are responsible for working on various committees and drafting final interpretations and standards. All of the standards are developed using an international consultation process which includes input and feedback from the Standards Advisory Committee (SAC) and organizations from around the globe.