IFRS vs. U.

S GAAP
What is IFRS?
IFRS stands for International Financial Reporting Standards It is a widely accepted set of
accounting principles that is in use outside the USA in most countries. It has largely replaced the
individual country GAAP that existed in the countries that now use IFRS. Therefore, as its name
indicates, you should think of IFRS as "internationals GAAP" compared to "U.S.GAAP."

Specific primary differences between IFRS and U.S. GAAP We will now go into the details of the
significant differences between the two standards and how these variances could affect
financial statements. We will cover the following areas:
1) Inventories (costing methods, valuation and write-downs (e.g., LIFO)),
2) Revenue recognition (the sale of goods, services and construction contracts),
3) Expense recognition (share-based payments and employee benefits),
4) Intangible assets (development costs and revaluation),
5) Leases (leases of land and buildings),
6) Long-lived assets (revaluation, depreciation, and capitalization of borrowing costs),
7) Impairment of assets (determination, calculation and reversal of loss), and
8) Financial statement presentation (extraordinary items and changes in equity).

1) Inventories

How do IFRS and U.S. GAAP differ on LIFO inventory?

LIFO is prohibited under IFRS, but allowed under U.S. GAAP.

How do IFRS and U.S. GAAP differ on inventory costing methods?

Under IFRS, the same cost must be applied to all inventories similar in nature or similar
in use to the company. Under U.S.GAAP, the same cost method is not explicitly required
for all inventories similar in nature.

How do IFRS and U.S. GAAP differ on inventory valuation?

Under IFRS, inventory is carried at the lower of cost or net realizable value
Exception: biological inventory items are valued at fair value less the cost to sell at the
point of harvest.
Under U.S. GAAP, inventory is carried at the lower of cost or market (LCM)

How do IFRS and U.S. GAAP differ on reversal of inventory Write-downs?

Both systems require that inventory be written down as soon as its cost is higher than
its net realizable value.
IFRS allows for reversals to be made and subsequent increases in value to be recognized
in financial statements. These reversals are limited to the amount of the original write-
down. GAAP prohibits reversals altogether.

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2) Revenue recognition

What are the requirements for revenue recognition under IFRS?

Revenue is recognized under IFRS when the risks and rewards of ownership have been
transferred, the buyer controls the goods, the revenues can be measured reliably, and it
is probable that the economic benefits will flow to the company.

What are the requirements for revenue recognition under U.S. GAAP?
Revenue is recognized when it is realized or realizable, and when it is earned. This
usually takes place when there is persuasive evidence of a contractual arrangement,
delivery has occurred, the revenue is fixed and determinable, and collectability is
reasonably assured.

How do IFRS and U.S. GAAP differ on the preferred method of service
revenue recognition?
Under IFRS, revenue from service contracts is recognized in the period that the service is
rendered, generally using the percentage of completion method, if the outcome of
‘rendering services can't be estimated reliably, IFRS requires use of the cost recovery
method.
Under U.S. GAAP, revenue from service contracts is recognized in the period that the
service is rendered, generally using the straight line method rather than the percentage
of completion method.

How do IFRS and U.S. GAAP differ on the completed contract method of
construction contract accounting?
The completed contract method is not permitted under IFRS, but is allowed under U.S
GAAP.

3) Expense recognition

What about Share based payments under IFRS?

Under IFRS, based upon the fair value of the goods or services received, and only on the
fair value of the equity instruments in the rare situations when the fair value of the
goods and services can't be reliably estimated .the measurement date is the date when
the company obtains the goods or the non-employee renders the services. No
Performance commitment concept exists. .

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 What about Share based payments under U.S. GAAP?
Under U.S. GAAP, based upon the fair value of the goods or services received or the
equity instruments used to settle the transaction, whichever is more reliable.
Measurement date is the earlier of (1) the date at which a commitment for performance
by the counterparty is reached, or (2) the date at which the counterparty’s performance
is complete.

Employee benefits how expense for past service costs recognized under
a defined benefit plan?
Under IFRS, Expense for vested past service costs is recognized immediately into profit
and loss. Expense for unvested past service costs is recognized into profit and loss over
the average remaining vesting period.

Under U.S. GAAP, Expense for past service costs are recognized initially in (OCI).
Both vested and unvested amounts are then amortized into profit or loss over the
average remaining service period.

4) Intangible assets

How do IFRS and U.S. GAAP differ on initial valuation of R&D

development costs?
Under U.S. GAAP, research and development costs are expensed as incurred Under
IFRSs, development costs may be capitalized.
Under IFRS, internal development expenditures are capitalized when technical and
economic feasibility of a project can be demonstrated in accordance with specific
criteria. Some of the criteria include: (1) intent to complete the asset, and (2) ability to
sell the asset in the future. These capitalization criteria are applied to all internally
developed intangible assets.
U.S. GAAP, internal development expenditures are expensed as incurred unless there is
a separate standard that requires capitalization. Special capitalization criteria apply to
software developed for internal use and software developed for sale to third parties.
Expenditures related to computer software developed for external use are capitalized
once technological feasibility is established in accordance with specific criteria.
Expenditures related to software developed for internal use are only capitalized during
the application development stage.

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 How do IFRS and U.S. GAAP differ on intangible asset revaluation?
Under U.S. GAAP, revaluation is not permitted.
Under IFRS, revaluation to fair value of intangible assets other than goodwill is
permitted for a class of intangible assets. Intangible assets can be measured using either
the cost model (1) or the revaluation model (2).
♥The incremental carrying amount of an intangible asset that results from a revaluation
is recognized in OCI and accumulated in equity under the heading of revaluation
surplus.
♥When the asset’s carrying amount is decreased as the result of a revaluation, the
decrease is recognized in profit or loss. However, the decrease shall be recognized in
OCI to the extent of credit balance existing in the revaluation surplus regarding the
asset. The decrease recognized in OCI reduces the amount accumulated in equity under
the heading of revaluation surplus.
♥When the asset is retired; the revaluation surplus may be transferred directly to
retained earnings. This transfer may also occur during the useful life of the asset in a
systematic way based upon the difference between the amortization based on the
revalued carrying amount of the asset and the amortization based on the asset’s original
cost. A transfer of the surplus to retained earnings through the profit and loss is not
performed.

Finally note that: Intangible asset revaluation is relatively uncommon in practice

because it is difficult to find an appropriate reference point in an active market for the
specific type of intangible asset.

5) Leases

How do IFRS and U.S. GAAP differ on the requirement for separate
evaluation of land and building to classify a lease?
Under US GAAP, the land and building elements of the lease are considered jointly
unless the amount that would be initially recognized for the land element is material
(above 25% of the total fair value of the leased property). If the fair value of the land at
inception represents 25% or more of the total fair value of the lease, the lessee must
consider the land and building components separately. If the lease for land and
buildings transfers ownership or contains a bargain purchase option, then the lease is
automatically a capital lease regardless of the value of the land and buildings.

Under IFRS, the land and building elements of the lease are considered separately
unless the amount that would be initially recognized for the land element is immaterial.
In this case the land and building would be treated as a single unit for purposes of lease
classification.

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6) Long-lived assets

How do IFRS and U.S. GAAP differ on long-lived asset revaluation?

Under U.S. GAAP, revaluation is not permitted, Under IFRS, Same as IFRS accounting
treatment of intangible assets.
♥ Under IFRSs, fair value accounting for P, P& E is allowed when fair value is reliably
measurable.
♥IFRSs allow a choice of either cost model or revaluation method for valuing P, P& E
subsequent to initial acquisition.
♥The cost method recognizes the value of P, P& E at its cost less accumulated
depreciation.
♥Under IFRS, when an entity chooses the revaluation model as its accounting policy for
measuring P, P& E; when an asset is revalued, the entire class of P, P& E to which that
asset belongs must be revalued not only the individual asset.
♥There is no rule for the frequency or date of revaluation .The revaluation may be done
periodically and the asset is carried at the fair value less any accumulated depreciation
from the date of remeasurement.
♥The difference between the cost method and revaluation method is that, while the
accumulated depreciation in the cost method is from the date of purchase, in the
revaluation method is from the date of re- measurement.
♥When the revaluation method is used for reporting P, P& E under IFRS, any gain or loss
is recorded in a revaluation surplus account which is classified as OCI and when the
asset is sold any credit amount in OCI is transferred to retained earnings.

How do IFRS and U.S. GAAP differ on long-lived asset residual value?
Under U.S. GAAP, the residual value of the asset is the discounted present value of
expected proceeds on the future disposal of the asset. Residual value may only be
adjusted downwards.
Under IFRS, the residual value of the asset is the current net selling pricing assuming the
asset was already at the disposal age and in the condition expected at the end of its
useful life. Residual value may be adjusted upwards or downwards.
♥An increase in the residual value is allowed under IFRS. Subsequent depreciation is
adjusted accordingly as a change in an accounting estimate. If the residual value of an
asset increases to an amount equal to or greater than the asset’s carrying amount, then
the asset’s deprecation charge is zero unless and until its residual value subsequently
decreases to an amount below the asset’s carrying amount.

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How do IFRS and U.S. GAAP differ on long-lived asset Depreciation?
Under U.S. GAAP, Component depreciation is permitted.
♥ Estimates of useful life, the residual values, and the method of depreciation are
reviewed only when events or changes in circumstances indicate that the current
estimates or depreciation methods no longer are appropriate.

Under IFRS, Component depreciation is required if components of an asset have

differing patterns of usage and economic value to the company.
♥IFRS requires each major component to be depreciated over its respective useful life.
♥Estimates of useful life, residual values, and the method of depreciation are reviewed
at least at each annual reporting date.

How do IFRS and U.S. GAAP differ on long-lived asset Major inspection or
overhaul costs?
Under IFRS, Generally included in the cost of the asset and depreciated over the
remaining life of the asset

Under U.S. GAAP, Choice exists: - Expense as incurred, or Include in the cost of the asset
and depreciate over the remaining life of the asset, or defer and amortize over the
period till the next overhaul date

How do IFRS and U.S. GAAP differ on eligible expenditures for

capitalization?
Under U.S. GAAP, eligible borrowing costs include only interest.
Under IFRS, eligible borrowing costs include interest, miscellaneous ancillary costs, and
exchange rate differences from foreign currency borrowings that are regarded as an
adjustment of interest.
♥ Both IFRS and U.S. GAAP required borrowing costs incurred after the asset is prepared
for its intended use are expensed

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7) Impairment of assets

How do IFRS and U.S. GAAP differ on calculation of asset impairment

value?
Under U.S. GAAP, the impairment value is the difference between the carrying amount
of the asset and its fair value (undiscounted cash flows of the asset or asset group).

Under IFRS, the impairment value is the difference between the carrying amount of the
asset and the recoverable amount.
♥ The recoverable amount is the higher of (1) the fair value less costs to sell and (2) the
value in use (the present value of future cash flows in use including the residual value).

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 How do IFRS and U.S. GAAP differ on accounting for an impairment
loss?
Under U.S. GAAP, an impairment loss is booked directly to profit and loss. Revaluation
upward of assets is not possible.
Under IFRS, an impairment loss on a revalued asset is charged directly to the revaluation
reserve in other comprehensive income to the extent that it reverses a previous
revaluation surplus related to the same asset. Any excess is recognized in profit or loss.

8) Financial statement presentation

How do IFRS and U.S. GAAP differ on presentation of extraordinary

items?
Under U.S. GAAP, separate presentation of extraordinary items in the profit and loss
statement is permitted for items that are both unusual and infrequent.

Under IFRS, separate presentation of extraordinary items in the profit and loss
statement is prohibited.

How is comprehensive income reported?

U.S GAAP requirement Choose from three alternatives:-
1) In a single statement of comprehensive income, or
2) Using a separate profit and loss statement together with a statement of
comprehensive income, or
3) Within the statement of changes in equity only
♥Thus a company is not required to present a statement of comprehensive income and
another statement of changes in equity.

IFRS requirement Choose from two alternatives:-

1) In a single statement of comprehensive income, or
2) Using a separate profit and loss statement and a separate statement
of comprehensive income.
♥Thus a company must present a statement of comprehensive income and another
statement of changes in equity.