IFRS vs US GAAP in 2020: Top 5 Most Common Differences

A few years ago I wrote an article about differences between IFRS and US GAAP.

And, I was completely wrong!

Why?

I assumed, or better said – I expressed the hope that by 2015, we would have a single set of the global reporting standards.

Now, it is 2020 and although the world has come closer to the uniform accounting principles (IFRS), US GAAP is still around and doing pretty well and yes, accountants still face a challenging task when they need to prepare two different sets of standards.

However, a convergence process of US GAAP and IFRS steadily progresses and yes, some results are visible by now.
 

Huge reforms in IFRS and US GAAP in the past years

Since 2014, both International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) worked very hard and issued a number of new standards tackling the major accounting areas:

• Revenue recognition: IFRS 15 and ASC 606 were issued;
• Lease accounting: IFRS 16 and ASC 842 were issued;
• Financial instruments: IFRS 9 was completed and FASB issued many subtopics such as 815-10, 820-10, 825-10, 946-320; ASC 860);
• Insurance: IFRS 17 and ASC 944 were issued.

Although most of these new developments brought US GAAP and IFRS closer together, some other differences arose.

Also, it seems that IASB and FASB decided to adopt different timelines.

While under IFRS, all new major changes have already been mandatory and effective (except for insurance – we have to wait until 2023), FASB postponed effective dates to the future for many entities, which practically means that for a few years, companies may report under new IFRS, but under older US GAAP rules.

 
As a result, the financial statements under US GAAP can be pretty different from those under IFRS.

However, one of the major areas – revenue recognition – is aligned, so at least this is the good news!

Let me pick up a few differences and sum them up for you.
 

#1 Presentation of financial statements in general

 

Format of financial statements

IFRS does NOT prescribe the uniform format of presenting your balance sheet (statement of financial position), income statement, statement of changes in equity, etc.

Instead, it is up to YOU to draft the format that works for your company in the best way, depending on the transactions and the activities of a company.

US GAAP also does not prescribe the format – with one exception. If a company is public, then it must follow the format of financial statements prescribed by the Regulation S-X.
 

Components of financial statements

IFRS prescribes 5 components of financial statements creating a complete set:

1. A statement of financial position;
2. A statement of profit or loss and OCI;
3. A statement of changes in equity;
4. A statement of cash flows; and
5. Notes to the financial statements.

US GAAP basically requires the same, with one exception:

You can present statement of changes in equity either:

• As a separate statement; OR
• Within the notes to the financial statements.

 

Comparative information

As we all know, IFRS requires presenting comparative information for the previous reporting period.

So, you need to present two statements of financial position and other statements.

And, if you change accounting policy or correct material errors, you even need to present three statements of financial position, including the one as at the beginning of the earliest comparative period.

Not under US GAAP.

In general, US GAAP does not require presenting comparative information, however – public entities listed on stock exchange must follow SEC rules and yes, they do present comparatives.

However, the third balance sheet is not required under US GAAP at any circumstances.
 

#2 Fair valuation

The concept of fair value measurement applies throughout both the IFRS standards and US GAAP, so both sets of rules have one specific standard dealing with fair values:

• IFRS has IFRS 13 Fair Value Measurement; and
• US GAAP has ASC 820 Fair Value Measurement.

These two standards are pretty similar in their basic principles of fair value measurement (e.g. FV hierarchy, observable inputs, market participants, etc.).

Maybe one significant difference is that US GAAP permits using net asset value instead of fair value for some types of investments (e.g. some interests in private equity funds).

The differences lie more in the measurement rules prescribed by the other standards.

Just a few examples:

• Measurement of PPE (IAS 16): While IAS 16 permits revaluation model (with periodical revaluation of PPE to their fair value), US GAAP permits only cost model – no revaluations.
• Measurement of investment property (IAS 40): This gets even more interesting, because US GAAP simply does not know the term “investment property”. Under US GAAP, you either classify the asset as held-for-sale or as PPE, and you apply cost model to even those buildings that are held for rental purposes or capital appreciation. So, no fair values related to PPE under US GAAP.
• Biological assets (IAS 41): IFRS widely applies fair value measurement of biological assets throughout its life, but not US GAAP. Basically growing plants and animals for sale are held as inventories and measured at cost basis. Moreover, “production” animals (e.g. cows for milk) are measured on a cost basis and accounted for as PPE under US GAAP.

As you can see, IFRS is more supportive of fair values than US GAAP.
 

#3 Leases

As I wrote above, lease accounting one major accounting area that went through revision during past years in both IFRS and US GAAP.

The new lease standard IFRS 16 was issued in January 2016 and its counterpart ASC 842 was issued 1 month later, in February 2016. Both standards were amended later on.

So, we would expect elimination of any differences between US GAAP and IFRS, right?

Well, not exactly, because new differences arose.

 
I originally started to list those differences here in this article, but I went on and on and thus I decided to publish the full article dedicated to leases US GAAP vs. IFRS.

For now, let me briefly list a few of them:

• Classification of leases by the lessees:
  • Under IFRS, lessees do NOT classify the leases.
  • Under US GAAP, lessees classify the leases as either finance or operating.
• Accounting for leases by the lessees:
  • Under IFRS, lessees account for all leases in the same way (right-of use asset, lease liability), with 2 exceptions: short-term leases and low-value leases.
  • Under US GAAP, initially, lessees account for both operating and finance lease in the same way (ROU asset, lease liability). Subsequently, accounting for lease liability is the same for both types of leases, but there is a difference in amortizing ROU asset.
• Exemptions from classification:
  • IFRS provides two exemptions: low-value leases and short-term leases;
  • US GAAP has just one exemption: short-term lease. There is NO exemption for low-value leases.
• Classification of leases by the lessors:
  • Under IFRS, lessors classify the leases as either operating or finance. Furthermore, IFRS differentiates between manufacturer or dealer lessors and other lessors.
  • US GAAP classifies the leases as operating, direct financing lease and sales-type lease (the latter two are similar as finance lease in IFRS).
  • Classification criteria are very similar, although there are differences in their assessment.
• Accounting for operating leases by lessors: this is very similar under IFRS and US GAAP, with small differences.
• Accounting for other leases by lessors:
  • IFRS basically between manufacturer or dealer lessors and other lessors – the difference is the accounting for selling profit. However, mechanics of accounting for finance part is the same (net investment in the lease, allocation, please see more here).
  • Under US GAAP, sales-type lease is very similar to manufacturer or dealer lessor lease in IFRS. Direct financing lease is similar to other finance lease in IFRS, but there is a difference in profit at the lease commencement accounting.

This was just a brief overview. There are also some differences in lease modifications, sales and leaseback and other. In my next article, I will try to come up with some excel example, too.
 

#4 Financial instruments

Financial instruments are a huge area in both IFRS and US GAAP and although the efforts are here, the standards differ in many aspects.

Also, while IFRS basically has a few standards on financial instruments, like IAS 32, IFRS 7 and IFRS 9, US GAAP have greater amount of various pronouncements and topics – that makes the comparison even more challenging.

Just two main picks for your to illustrate (not to be comprehensive – I would need three articles to list it all):

• Classification of financial assets:
  • IFRS has 3 basic categories of financial assets (FVTPL, FVOCI, amortized cost).
  • US GAAP does not have these categories applicable to ALL financial assets. Instead, US GAAP has categories of various types of financial assets, for example debt securities are further classified into 3 categories, and even loans and receivables and specifically classified into different categories.
• Expected credit loss:
  • IFRS has two measurements possible for expected credit loss (ECL): 12-month ECL and lifetime ECL.
  • US GAAP permits just one basis: lifetime ECL. And, there are more differences in application of ECL rules, including credit-impaired assets at initial recognition, etc.

And of course, the differences go on and on, some of them are more serious, some of them are small.

You can read a bit more on comparing IFRS and US GAAP rules related to financial instruments here.
 

#5 Other differences

In this article I wanted to focus specifically on what’s new in the light of development in the last few years, but let me remind you some differences that are brought forward from the past:

• Inventories: US GAAP still permits LIFO method, while IFRS does not.
• Internally developed intangible assets: IFRS permits capitalizing expenses for internally developed intangible assets if 6 criteria are met (remember PIRATE). As opposed to that, US GAAP permits capitalizing expenses for internal development of software and motion picture film costs under specific criteria, but nothing else.
• Impairment loss on non-financial assets: there are slightly different approaches when calculating impairment loss (US GAAP has 2-step approach). Also, allocation of impairment loss of CGU differs in respect of goodwill. What is more important, US GAAP prohibits reversal of impairment loss (IFRS permits it).

 

Finally…

I really hope that this article gave you the overview of these two sets of standards. I guess they will still coexist for some time in the future instead of erasing all the differences instantly.

If you would like to learn more, I would like to draw your attention to three great resources in US GAAP, all provided in cooperation with Ernst&Young Academy of Business. You can get more info and 10+% discount here on IFRSbox, but let me brief you:

• US GAAP vs. IFRS – Introduction: 2-hour online webinar that will give you quick introduction to this topic with live tutor. You can ask questions during and after webinar, and you will have a replay available within month after webinar. 2 CPD units. Careful: the new date is 10 December 2020, not the one mentioned in the brochure.
• IFRS vs. US GAAP – Main Differences: This one goes much deeper. It is a 2-day webinar with deeper coverage and practical discussion. Again, ask questions and get replay within 1-month after the webinar. 14 CPD units.
• EY Diploma in Application of US GAAP: This is a certification course for professionals who need to know US GAAP in depth and also wish to get a diploma. 8 x 1-day online webinars completed with the exam. 7 CPD units per day (56 in total, spread into two years).

Any remarks or questions? Please leave a comment below. Thank you!