“What’s the fuss over IFRS?”
Providing a brief overview of the transition to adoption of IFRS and convergence with US GAAP. While we realize that IFRS will become a future reality, the question lingered regarding the differences between the two accounting standards. I thought it would be useful to assess the areas of major differences. In this short blog post, it will not be impossible to address all the components of IFRS but we’ll try and capture primary differences.
IFRS standards are broader and more principles-based than U.S. GAAP. This represents a hurdle for many U.S. CPA’s because we have been used to narrow “bright line” rules and guidelines on how to apply GAAP. IFRS tends to leave implementation of the principles up to preparation of financial statements and auditors. The regulatory and legal environment in the United States has been primarily responsible for narrower prescriptive interpretation of accounting rules. Adoption of IFRS will require a paradigm shift by accountants in the United States.
Financial statement presentation represents an area where differences exist. For example International Accounting Standards does not provide a standard layout as prescribed by the SEC. One of the big differences is that IFRS requires debt associated with a covenant violation to be presented as a current liability unless there a lender agreement was reached prior to the balance sheet date. US GAAP allows the debt to be presented as non-current if an agreement was reached prior to issuing the financial statements. Another difference in financial statement presentation deals with income statement classification of expenses. The SEC requires presentation of expenses based on function whereas IFRS allows expenses to be presented by either function or nature of expenses. Additional differences exist with presentation of significant items. Variations emerge with disclosure of performance measures such as operating profit. IFRS does not define such items so there can be significant diversity in the items, headlines, and subtotals of the income statement between US GAAP and IFRS.
A big area of divergence is with negative goodwill and research and development. IFRS requires that a reassessment of purchase price allocation be recognized as income while US GAAP allows negative goodwill to be allocated on a pro rata basis and can recognize the excess of the carrying amount of certain assets as an extraordinary gain. US GAAP requires research and development to be expensed immediately in contrast to IFRS which allows it to be capitalized as a finite-lived intangible asset. IFRS allows revaluation to the fair value of intangible assets other than goodwill whereas US GAAP does not permit revaluation.
There are both similarities and differences in the treatment of inventory. US GAAP allows LIFO as an acceptable costing method in contrast to IFRS which prohibits the use of LIFO. There are also some differences in measurement of inventory value. US GAAP states that inventory should be carried at the lower of cost or market. Market is defined as current replacement cost as long as market does not exceed net realizable value. IFRS allows inventory to be carried at the lower of cost or net realizable value which is the best estimate of the amounts which inventories are expected to realize and may or may not be equal to fair value.
While there are differences, the two standards boards are working to bring the two standards closer together. This should make the shift to IFRS easier when it comes time to change. One of the most significant areas where differences are being converged is revenue recognition. Currently US GAAP is more prescriptive than IFRS, especially for application to specific industry situations such as the sale of software and real estate. It will take time and effort to bring the two standards on to the same page. I looked at the two standards with the objective of understanding the key differences. The journey to convergence and adoption of IFRS will be interesting, challenging, and educational to say the least.
The IFRS: History and Purpose
The IFRS is designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade. The IFRS is particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards.
The IFRS began as an attempt to harmonize accounting across the European Union, but the value of harmonization quickly made the concept attractive around the world. They are occasionally called by the original name of International Accounting Standards (IAS). The IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On April 1, 2001, the new IASB took over the responsibility for setting International Accounting Standards from the IASC. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards the IFRS.
The Conceptual Framework for Financial Reporting states the basic principles for IFRS. The IASB and FASB frameworks are in the process of being updated and converged. The Joint Conceptual Framework project intends to update and refine the existing concepts to reflect the changes in markets and business practices. The project also intends consider the changes in the economic environment that have occurred in the two or more decades since the concepts were first developed.
IFRS Defined Objective of Financial Statements
A financial statement should reflect true and fair view of the business affairs of the organization. As these statements are used by various constituents of the society/regulators, they need to reflect an accurate view of the financial position of the organization. It is very helpful to check the financial position of the business for a specific period.
Learn more about US GAAP Click Here: Generally Accepted Accounting Principles – Rohitashva Singhvi
Thanks for Reading.
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