Overview

IFRS Differences in Accounting

The two most common accounting standards used throughout the world are U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial
Reporting Standards (IFRS). Up to this point, the lessons in Section A have used U.S. GAAP rules. In many cases these two sets of standards are very similar, but in
some cases, there are significant differences. This lesson will describe the main differences between these two sets of accounting standards.

Upon completion of this lesson, candidates should be able to:

Identify and describe the following differences between U.S. GAAP and IFRS: (i) expense recognition, with respect to share-based payments and employee
benefits; (ii) intangible assets, with respect to development costs and revaluation; (iii) inventories, with respect to costing methods, valuation, and write-downs
(e.g., LIFO); (iv) leases, with respect to lessee operating and finance leases; (v) long-lived assets, with respect to revaluation, depreciation, and capitalization of
borrowing costs; and (vi) impairment of assets, with respect to determination, calculation, and reversal of loss (1.A.2.ff).
Study Guide
IFRS Differences in Accounting

I. Expense Recognition, with Respect to Share-Based Payments and Employee Benefits

A. In most cases, expense recognition under IFRS is similar to U.S. GAAP.
B. There are a small number of key exceptions.
1. All share-based compensation, such as stock options, must be measured using a fair value approach.
a. Total compensation expense is measured at grant date by multiplying the number of options granted by their fair value at grant date.
b. Fair value is generally found using pricing models such as Black-Scholes.
c. The intrinsic value method [(Market Price − Strike Price) × Number of Shares] of measuring share-based compensation is used in limited
situations under U.S. GAAP, but is prohibited under IFRS.
2. Total compensation expense is spread over the service period using the accelerated method under IFRS in equity awards with graded vesting.
a. Straight-line method for recognizing compensation expense may be elected for U.S. GAAP, but no such election is available under IFRS.
b. Illustration: Lots of Stock Company offered $90,000 of stock-based compensation to its employees, which will vest in equal amounts at the
end of each of the next three years.
i. Under U.S. GAAP, Lots of Stock Company elects the straight-line method and the compensation expense will be allocated evenly over
the three vesting years. This results in a $30,000 ($90,000 ÷ 3) compensation expense each year.
ii. Under IFRS, using the accelerated method because no straight-line election is available, the $90,000 of stock-based compensation will
be treated like three different grants, one vesting each year. This accelerates the rate at which the entire compensation expense is
recorded.
Year 1: The compensation expense in the first year is $55,000 calculated as follows: [$30,000 × (1 year ÷ 1 year)] + [$30,000 × (1 year ÷ 2
years)] + [$30,000 × (1 year ÷ 3 years)].
Year 2: The compensation expense in the second year is $25,000, calculated as follows: [$30,000 × (1 year ÷ 2 years)] + [$30,000 × (1 year
÷ 3 years)].
Year 3: The compensation expense in the third year is $10,000, calculated as follows: [$30,000 × (1 year ÷ 3 years)].
II. Intangible Assets
A. Revaluation
1. Under U.S. GAAP, intangible assets are carried at amortized cost.
2. Under IFRS, intangible assets may be carried at amortized cost (the cost model) or revalued to fair value (the revaluation model) if there is an active
market for the asset.
B. Research and Development Costs
1. Under both U.S. GAAP and IFRS, research costs are expensed as incurred.
2. Under IFRS, development costs for internally developed intangible assets may be capitalized once the technological feasibility of the project has
been established and the following conditions are met:
a. The organization can demonstrate how the asset will generate future economic benefits.
b. The organization can demonstrate that it will use or sell the asset.
c. The organization has both the intent and the ability (i.e., financial and human resources) to complete the development.
d. The organization can measure the costs of development.
3. Under U.S. GAAP, all development costs are expensed as incurred, except for software development, which follows a process similar to IFRS
described above.
III. Inventory
A. IFRS does not allow the use of the last-in, first-out (LIFO) inventory method.
B. Inventory previously written down for lower of cost or net realizable value issues can be written back up to original cost if there is a recovery. U.S. GAAP
does not allow write-up of inventory previously written down unless both the write down and the recovery occur within the same fiscal year (i.e., Q2
write-down and Q3 recovery).
IV. Leases, with Respect to Lessee Operating and Finance Leases
A. IFRS leases are not classified as operating vs. finance like they are under U.S. GAAP. Rather, under IFRS, leases are accounted for similar to finance leases
under U.S. GAAP.
B. Lease accounting does not apply to assets with low values (immaterial) or to leases with a term shorter than 12 months. The payments made under these
lease agreements would be expensed as incurred and no asset or liability would be recognized upon lease signing.
V. Long-Lived Tangible Assets
A. Under IFRS, assets that can be separated into component parts must be separated for purposes of depreciation. U.S GAAP does not require separation
and would generally treat each asset as one item to be depreciated.
B. Under IFRS, organizations may elect to carry property, plant and equipment (PP&E) at depreciated cost similar to U.S. GAAP (the cost model) or at fair
value under the revaluation model after initial acquisition.
1. If the cost model is used, organizations may use a variety of depreciation methods similar to those available under U.S. GAAP.
2. Only PP&E whose fair value can be reliably estimated can be carried at a revalued amount.
3. PP&E is depreciated as normal, and revaluation gains and losses are calculated by comparing the book value to the estimated fair value upon
revaluation.
4. Depreciation after a revaluation is recalculated using the revalued amount and the remaining useful life of the PP&E.
5. Gains on revaluation are recorded in other comprehensive income (directly to equity) unless they are a reversal of a loss on revaluation previously
recorded in income, in which case they are recorded in income until the entire loss is reversed.
6. Losses on revaluation are recorded in income unless they are a reversal of a previous revaluation surplus recorded in other comprehensive income,
in which case they are recorded in other comprehensive income until the entire previous surplus is consumed.
C. Capitalization of interest when an organization is preparing a long-lived asset for its intended use differs between U.S. GAAP and IFRS.
1. IFRS requires capitalization of interest that is directly attributable to the construction or production of the asset.
 2. U.S. GAAP requires capitalization of interest that could have been avoided if the project had not been undertaken. This could include capitalization
of interest from loans for general corporate purposes that are not directly attributable to the asset and often requires an estimate of a weighted
average interest rate from various corporate obligations to be used.

Practice Question
Fancy Dishes (FD), a company that manufactures and sells glassware to supermarkets, follows IFRS. On January 1, 20X1, FD purchased a
$750,000 machine that creates gold-edged glassware. The fair value of the machine can be reliably estimated and FD elected to carry the
machine at fair value under the revaluation model. The machine will be depreciated straight-line over the next 20 years. On December 31, 20X1,
FD determined that the estimated fair value of the machine was $760,000. On December 31, 20X2, FD determined that the estimated fair value of
the machine was $660,000.
1. What is the revaluation gain or loss in Year 1 and where is the amount recorded?
2. What is the revaluation gain or loss in Year 2 and where is the amount recorded?

Answer
1. At December 31, 20X1, the machine was depreciated by $37,500 ($750,000 ÷ 20 years), to arrive at a book value of $712,500 ($750,000 −
$37,500). The machine was then revalued to $760,000. Gains on revaluation are recorded in other comprehensive income unless they are a
reversal of a loss on revaluation previously recorded in income, in which case they are recorded in income until the entire loss is reversed.
In this situation, the revaluation gain of $47,500 ($760,000 − $712,500) in Year 1 will be recorded in other comprehensive income.
2. Once a revaluation occurs, the new depreciation expense is calculated based on the new value of the asset divided by the remaining life. At
December 31, 20X2, the machine was depreciated by another $40,000 ($760,000 ÷ 19 years), to arrive at a book value of $720,000 ($760,000
− $40,000). The machine was then revalued to $660,000. Losses on revaluation are recorded in income unless they are a reversal of a
previous revaluation surplus recorded in other comprehensive income, in which case they are recorded in other comprehensive income
until the entire previous surplus is consumed. In this situation, $47,500 of the $60,000 ($720,000 − $660,000) revaluation loss in Year 2 offset
the surplus of $47,500 in other comprehensive income from Year 1 while the remaining $12,500 ($60,000 - $47,500) revaluation loss is
recorded in income.
VI. Impairment of Assets, with Respect to Determination, Calculation, and Reversal of Loss
A. Under U.S. GAAP, impairment is reviewed at the individual asset level. Under IFRS, an organization should review for impairment at the cash-generation
unit (CGU) level.
1. A CGU is the smallest level of assets that generate cash independent of other assets in the organization. A CGU is usually made up of more than one
asset.
2. The largest CGU an organization has is an operating segment, such as a division of a business.
B. Under IFRS, a one-step impairment test is used rather than the two-step model used for U.S. GAAP. The single step compares the recoverable amount of
the CGU to the carrying amount of the CGU and losses are recorded when the recoverable amount is lower. The recoverable amount is the greater of the
1. Fair value of the CGU less selling costs (net realizable value)
2. Value of the CGU in use (discounted cash flow analysis)
C. Recognizing reversals of prior impairment losses is prohibited under U.S. GAAP, but allowed under IFRS.
1. If the cost model is used for the assets, recovery of loss for long-lived fixed assets and for intangible assets with a finite life is allowed up to the
point of the initial carrying cost less an adjustment for depreciation/amortization.
2. If the cost model is used for indefinite-lived intangible assets, recovery of past losses is allowed up to the original carrying amount of the intangible
asset.

Summary
In the global world that we live in today, it is important to understand the difference between U.S. GAAP and IFRS accounting standards. Expense recognition is
largely the same between the two standards but you should understand the differences for share-based payments and employee benefits. In addition, you should
be familiar with the U.S. GAAP and IFRS differences in regards to intangible assets, inventory, leases, long-lived tangible assets, and impairment of assets.