US GAAP versus IFRS The basics - February 2018 - EY
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US GAAP versus IFRS The basics February 2018
Table of contents Introduction............................................................................. 1 Financial statement presentation............................................ 3 Interim financial reporting ....................................................... 7 Consolidation, joint venture accounting and equity method investees/associates.................................................. 8 Business combinations ..........................................................14 Inventory ...............................................................................18 Long-lived assets ..................................................................20 Intangible assets ...................................................................23 Impairment of long-lived assets, goodwill and intangible assets ...................................................................25 Financial instruments ............................................................29 Foreign currency matters......................................................38 Leases — before the adoption of ASC 842 and IFRS 16 ........40 Leases — after the adoption of ASC 842 and IFRS 16 ...........43 Income taxes .........................................................................47 Provisions and contingencies ................................................51 Revenue recognition — after the adoption of ASC 606 and IFRS 15 ...........................................................................53 Share-based payments..........................................................57 Employee benefits other than share-based payments ..........61 Earnings per share ................................................................63 Segment reporting ................................................................65 Subsequent events ................................................................67 Related parties ......................................................................69 IFRS resources ......................................................................70
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Introduction
There are two global scale frameworks of Key updates
financial reporting: US GAAP, as promulgated Our analysis generally reflects guidance
by the Financial Accounting Standards Board effective in 2017 and finalized by the FASB and
(FASB), and IFRS, as promulgated by the the IASB as of 31 May 2017. We updated this
International Accounting Standards Board guide to include Accounting Standards Update
(IASB) (collectively, the Boards). (ASU) 2014-09, Revenue from Contracts with
In this guide, we provide an overview, by Customers,1 (largely codified in Accounting
accounting area, of the similarities and Standards Codification (ASC) 606); IFRS 15,
differences between US GAAP and IFRS. We Revenue from Contracts with Customers;
believe that any discussion of this topic should ASU 2016-02, Leases (largely codified in
not lose sight of the fact that the two sets of ASC 842); IFRS 16, Leases; ASU 2016-01,
standards generally have more similarities than Recognition and Measurement of Financial
differences for most common transactions, Assets and Financial Liabilities; and IFRS 9,
with IFRS being largely grounded in the same Financial Instruments. We have not included
basic principles as US GAAP. The general differences before the adoption of ASC 606,
principles and conceptual framework are often IFRS 15, ASU 2016-01 and IFRS 9. Please refer
the same or similar in both sets of standards to the October 2016 edition of the tool for
and lead to similar accounting results. The these differences. This update doesn’t include
existence of any differences — and their differences related to ASU 2016-13, Financial
materiality to an entity’s financial statements — Instruments — Credit Losses (Topic 326):
depends on a variety of factors, including the Measurement of Credit Losses on Financial
nature of the entity, the details of the Instruments, because of the standard’s
transactions, the interpretation of the more delayed effective date.
general IFRS principles, industry practices and Our analysis does not include any guidance
accounting policy elections where US GAAP related to IFRS for small and medium-sized
and IFRS offer a choice. This guide focuses on entities or Private Company Council
differences most commonly found in current
alternatives that are embedded within
practice and, when applicable, provides an
US GAAP.
overview of how and when those differences
are expected to converge. We will continue to update this publication
periodically for new developments.
1
The guide also includes subsequent amendments in
ASU 2015-14, Deferral of the Effective Date; ASU 2016-08,
Principal versus Agent Considerations (Reporting Revenue
Gross versus Net); ASU 2016-10, Identifying Performance
Obligations and Licensing; ASU 2016-12, Narrow-Scope
Improvements and Practical Expedients; ASU 2016-20,
Technical Corrections and Improvements to Topic 606; and
ASU 2017-05, Other Income—Gains and Losses from the
Derecognition of Nonfinancial Assets (Subtopic 610-20):
Clarifying the Scope of Asset Derecognition Guidance and
Accounting for Partial Sales of Nonfinancial Assets.
US GAAP versus IFRS The basics | 1Introduction
* * * * *
Our US GAAP/IFRS Accounting Differences
Identifier Tool publication provides a more in-
depth review of differences between US GAAP
and IFRS as of 31 May 2017. The tool was
developed as a resource for companies that
need to analyze the accounting decisions and
changes involved in a conversion to IFRS.
Conversion is more than just an accounting
exercise, and identifying accounting
differences is only the first step in the process.
Successfully converting to IFRS also entails
ongoing project management, systems and
process change analysis, tax considerations
and a review of all company agreements that
are based on financial data and measures. EY
assurance, tax and advisory professionals are
available to share their experiences and assist
companies in analyzing all aspects of the
conversion process, from the earliest
diagnostic stages through the adoption of the
international standards.
To learn more about the US GAAP/IFRS
Accounting Differences Identifier Tool, please
contact your local EY professional.
February 2018
US GAAP versus IFRS The basics | 2Financial statement presentation
Financial statement presentation
Similarities changes in shareholders’ equity to be
There are many similarities in US GAAP and presented in the notes to the financial
IFRS guidance on financial statement statements, while IFRS requires the changes in
presentation. Under both sets of standards, shareholders’ equity to be presented as a
the components of a complete set of financial separate statement. Further, both require that
statements include: a statement of financial the financial statements be prepared on the
position, a statement of profit and loss accrual basis of accounting (with the exception
(i.e., income statement) and a statement of of the cash flow statement) except for rare
comprehensive income (either a single circumstances. IFRS and the conceptual
continuous statement or two consecutive framework in US GAAP have similar concepts
statements), a statement of cash flows and regarding materiality and consistency that
accompanying notes to the financial entities have to consider in preparing their
statements. Both US GAAP and IFRS also financial statements. Differences between the
require the changes in shareholders’ equity to two sets of standards tend to arise in the level
be presented. However, US GAAP allows the of specific guidance provided.
Significant differences
US GAAP IFRS
Financial periods Generally, comparative financial Comparative information must be
required statements are presented; however, a disclosed with respect to the previous
single year may be presented in certain period for all amounts reported in the
circumstances. Public companies must current period’s financial statements.
follow SEC rules, which typically require
balance sheets for the two most recent
years, while all other statements must
cover the three-year period ended on
the balance sheet date.
Layout of balance sheet There is no general requirement within IFRS does not prescribe a standard
and income statement US GAAP to prepare the balance sheet layout, but includes a list of minimum
and income statement in accordance line items. These minimum line items
with a specific layout; however, public are less prescriptive than the
companies must follow the detailed requirements in Regulation S-X.
requirements in Regulation S-X.
Balance sheet — Debt for which there has been a Debt associated with a covenant
presentation of debt as covenant violation may be presented violation must be presented as current
current versus as noncurrent if a lender agreement to unless the lender agreement was
noncurrent waive the right to demand repayment reached prior to the balance sheet date.
for more than one year exists before
the financial statements are issued or
available to be issued.
US GAAP versus IFRS The basics | 3Financial statement presentation
US GAAP IFRS
Balance sheet — Before the adoption of ASU 2015-17, All amounts classified as noncurrent in
classification of deferred Balance Sheet Classification of the balance sheet.
tax assets and liabilities Deferred Taxes, deferred taxes are
classified as current or noncurrent,
generally based on the nature of the
related asset or liability.
After the adoption of ASU 2015-17, all
deferred tax assets and liabilities will be
classified as noncurrent. (ASU 2015-17
is effective for public business entities
(PBEs) in annual periods beginning
after 15 December 2016, and interim
periods within those annual periods.
For other entities, it is effective for annual
periods beginning after 15 December
2017, and interim periods within annual
periods beginning after 15 December
2018. Early adoption is permitted.)
Income statement — No general requirement within Entities may present expenses based on
classification of US GAAP to classify income statement either function or nature (e.g., salaries,
expenses items by function or nature although depreciation). However, if function is
there are requirements based on the selected, certain disclosures about the
specific cost incurred nature of expenses must be included in
(e.g., restructuring charges, shipping the notes.
and handling costs). However, SEC
registrants are generally required to
present expenses based on function
(e.g., cost of sales, administrative).
Income statement — Discontinued operations classification is Discontinued operations classification
discontinued operations for components that are held for sale or is for components held for sale or
criteria disposed of and represent a strategic disposed of and the component
shift that has (or will have) a major effect represents a separate major line of
on an entity’s operations and financial business or geographical area, is part
results. Also, a newly acquired business of a single coordinated plan to dispose
or nonprofit activity that on acquisition is of a separate major line of business or
classified as held for sale qualifies for geographical area of or a subsidiary
reporting as a discontinued operation. acquired exclusively with an intention
to resell.
US GAAP versus IFRS The basics | 4Financial statement presentation
US GAAP IFRS
Statement of cash flows After the adoption of ASU 2016-18, There is no specific guidance about the
— restricted cash Statement of Cash Flows (Topic 230) — presentation of changes in restricted
Restricted Cash, changes in restricted cash and restricted cash equivalents on
cash and restricted cash equivalents the statement of cash flows.
will be shown in the statement of cash
flows. In addition, when cash, cash
equivalents, restricted cash and
restricted cash equivalents are
presented in more than one line item
on the balance sheet, ASU 2016-18
requires a reconciliation of the totals in
the statement of cash flows to the
related captions in the balance sheet.
This reconciliation can be presented
either on the face of the statement of
cash flows or in the notes to the
financial statements. (ASU 2016-18 is
effective for PBEs in annual periods
beginning after 15 December 2017,
and interim periods within those annual
periods. For all other entities, it is
effective for annual periods beginning
after 15 December 2018, and interim
periods within annual periods beginning
after 15 December 2019. Early
adoption is permitted.)
Disclosure of There is no general requirements Certain traditional concepts such as
performance measures within US GAAP address the “operating profit” are not defined;
presentation of specific performance therefore, diversity in practice exists
measures. SEC regulations define regarding line items, headings and
certain key measures and require the subtotals presented on the income
presentation of certain headings and statement. IFRS permits the presentation
subtotals. Additionally, public of additional line items, headings
companies are prohibited from and subtotals in the statement of
disclosing non-GAAP measures in the comprehensive income when such
financial statements and accompanying presentation is relevant to an
notes. understanding of the entity’s financial
performance. IFRS has requirements
on how the subtotals should be
presented when they are provided,
US GAAP versus IFRS The basics | 5Financial statement presentation
US GAAP IFRS
Third balance sheet Not required. A third balance sheet is required as of
the beginning of the earliest comparative
period when there is a retrospective
application of a new accounting policy,
or a retrospective restatement or
reclassification, that have a material
effect on the balances of the third
balance sheet. Related notes to the third
balance sheet are not required. A third
balance sheet is also required in the
year an entity first applies IFRS.
Standard-setting activities The IASB currently has a project on its agenda
The FASB currently has a simplification project to amend IAS 1, Presentation of Financial
to amend today’s guidance for determining Statements, to clarify the criteria for classifying
whether to classify debt as current or noncurrent a liability as either current or noncurrent. The
on the balance sheet. The FASB issued an IASB issued its exposure draft, Classification of
exposure draft in January 2017 that would Liabilities, in February 2015, and in December
replace today’s rules-based guidance with a 2015 it discussed comment letters received on
principle-based approach, and in June 2017 it that proposal. The IASB has decided to defer
discussed comments received on the proposals. making a decision about whether to finalize the
In November 2017, the FASB completed a proposals until it has redeliberated the definitions
maintenance update to locate all guidance of assets and liabilities in the conceptual
related to the income statement and the framework exposure draft.
statement of comprehensive income in one
place. The guidance that was previously in ASC
225, Comprehensive Income Statement, was
relocated to ASC 220, Income Statement —
Reporting Comprehensive Income.
US GAAP versus IFRS The basics | 6Interim financial reporting
Interim financial reporting
Similarities and provide for similar disclosure requirements.
ASC 270, Interim Reporting, and IAS 34, Under both US GAAP and IFRS, income taxes
Interim Financial Reporting, are substantially are accounted for based on an estimated
similar except for the treatment of certain costs average annual effective tax rates. Neither
described below. Both require an entity to apply standard requires entities to present interim
the accounting policies that were in effect in the financial information. That is the purview of
prior annual period, subject to the adoption of securities regulators such as the SEC, which
new policies that are disclosed. Both standards requires US public companies to comply with
allow for condensed interim financial statements Regulation S-X.
Significant differences
US GAAP IFRS
Treatment of certain Each interim period is viewed as an Each interim period is viewed as a
costs in interim periods integral part of an annual period. As a discrete reporting period. A cost that
result, certain costs that benefit more does not meet the definition of an asset
than one interim period may be at the end of an interim period is not
allocated among those periods, deferred, and a liability recognized at
resulting in deferral or accrual of an interim reporting date must
certain costs. represent an existing obligation.
Standard-setting activities
There is currently no standard-setting activity
in this area.
US GAAP versus IFRS The basics | 7Consolidation, joint venture accounting and
Consolidation, joint venture accounting and equity method investees/associates
equity method investees/associates
Similarities An equity investment that gives an investor
ASC 810, Consolidation, contains the main significant influence over an investee (referred to
guidance for consolidation of financial as “an associate” in IFRS) is considered an equity
statements, including variable interest entities method investment under both US GAAP
(VIEs), under US GAAP. IFRS 10, Consolidated (ASC 323, Investments — Equity Method and
Financial Statements, contains the IFRS guidance. Joint Ventures) and IFRS (IAS 28, Investments
in Associates and Joint Ventures). Further, the
Under both US GAAP and IFRS, the equity method of accounting for such investments
determination of whether entities are generally is consistent under US GAAP and IFRS.
consolidated by a reporting entity is based on
control, although there are differences in how The characteristics of a joint venture in US GAAP
control is defined. Generally, all entities (ASC 323) and IFRS (IFRS 11, Joint Arrangements)
subject to the control of the reporting entity are similar but certain differences exist. Both
must be consolidated (although there are limited US GAAP and IFRS also generally require
exceptions for a reporting entity that meets investors to apply the equity method when
the definition of an investment company). accounting for their interests in joint ventures.
Significant differences
US GAAP IFRS
Consolidation model US GAAP provides for primarily two IFRS provides a single control model for
consolidation models (variable interest all entities, including structured entities
model and voting model). The variable (the definition of a structured entity
interest model evaluates control under IFRS 12, Disclosure of Interests in
based on determining which party has Other Entities, is similar to the definition
power and benefits. The voting model of a VIE in US GAAP). An investor
evaluates control based on existing controls an investee when it is exposed
voting rights. All entities are first or has rights to variable returns from its
evaluated as potential VIEs. If an involvement with the investee and has
entity is not a VIE, it is evaluated for the ability to affect those returns
control pursuant to the voting model. through its power over the investee.
Potential voting rights are generally Potential voting rights are considered.
not included in either evaluation. Notion of “de facto control” is also
The notion of “de facto control” is considered.
not considered.
Preparation of Consolidated financial statements are Consolidated financial statements are
consolidated financial required, although certain industry- required, although certain industry-
statements — general specific exceptions exist specific exceptions exist
(e.g., investment companies). (e.g., investment entities), and there is a
limited exemption from preparing
consolidated financial statements for a
parent company that is itself a wholly
owned or partially owned subsidiary, if
certain conditions are met.
US GAAP versus IFRS The basics | 8Consolidation, joint venture accounting and equity method investees/associates
US GAAP IFRS
Preparation of Investment companies do not Investment companies (“investment
consolidated financial consolidate entities that might entities” in IFRS) do not consolidate
statements — Investment otherwise require consolidation entities that might otherwise require
companies (e.g., majority-owned corporations). consolidation (e.g., majority-owned
Instead, equity investments in these corporations). Instead, these
entities are reflected at fair value as a investments are reflected at fair value
single line item in the financial as a single line item in the financial
statements. A parent of an statements. However, a parent of an
investment company is required to investment company consolidates all
retain the investment company entities that it controls, including those
subsidiary’s fair value accounting in controlled through an investment
the parent’s consolidated financial company subsidiary, unless the parent
statements. itself is an investment company.
Preparation of The reporting entity and the The financial statements of a parent and
consolidated financial consolidated entities are permitted its consolidated subsidiaries are prepared
statements — different to have differences in year-ends of up as of the same date. When the parent
reporting dates of parent to three months. and the subsidiary have different
and subsidiaries The effects of significant events reporting period end dates, the subsidiary
occurring between the reporting prepares (for consolidation purposes)
dates of the reporting entity and the additional financial statements as of the
controlled entities are disclosed in the same date as those of the parent, unless
financial statements. it is impracticable.
If it is impracticable, when the difference
in the reporting period end dates of the
parent and subsidiary is three months or
less, the financial statements of the
subsidiary may be adjusted to reflect
significant transactions and events, and
it is not necessary to prepare additional
financial statements as of the parent’s
reporting date.
Uniform accounting Uniform accounting policies between Uniform accounting policies between
policies parent and subsidiary are not required. parent and subsidiary are required.
Changes in ownership Transactions that result in decreases in Consistent with US GAAP, except that
interest in a subsidiary the ownership interest of a subsidiary this guidance applies to all subsidiaries,
without loss of control without a loss of control are accounted including those that are not businesses or
for as equity transactions in the nonprofit activities and those that involve
consolidated entity (i.e., no gain or loss the conveyance of oil and gas mineral
is recognized) when: (1) the subsidiary rights.
is a business or nonprofit activity
(except in a conveyance of oil and gas
mineral rights) or (2) the subsidiary is
not a business or nonprofit activity, but
the substance of the transaction is not
addressed directly by other ASC Topics.
US GAAP versus IFRS The basics | 9Consolidation, joint venture accounting and equity method investees/associates
US GAAP IFRS
Loss of control of a For certain transactions that result in Consistent with US GAAP, except that
subsidiary a loss of control of a subsidiary, any this guidance applies to all subsidiaries,
retained noncontrolling investment in including those that are not businesses or
the former subsidiary is remeasured to nonprofit activities and those that involve
fair value on the date the control is conveyance of oil and gas mineral rights.
lost, with the gain or loss included in
income along with any gain or loss on In addition, the gain or loss resulting
the ownership interest sold. from the loss of control of a subsidiary
This accounting is limited to the that does not constitute a business in a
following transactions: (1) loss of transaction involving an associate or a
control of a subsidiary that is a business joint venture that is accounted for using
or nonprofit activity (except for a the equity method is recognized only to
conveyance of oil and gas mineral the extent of the unrelated investors’
rights) and (2) loss of control of a interests in that associate or joint
subsidiary that is not a business or venture. 2
nonprofit activity if the substance of the
transaction is not addressed directly by
other ASC Topics.
Loss of control of a For certain transactions that result in For transactions that result in a loss of
group of assets that a loss of control of a group of assets control of a group of assets that meet
meet the definition of that meet the definition of a business the definition of a business, any retained
a business or nonprofit activity, any retained noncontrolling investment in the former
noncontrolling investment in the group of assets is remeasured to fair value
former group of assets is remeasured on the date control is lost, with the gain
to fair value on the date control is lost, or loss included in income with any gain
with the gain or loss included in or loss on the ownership interest sold.
income along with any gain or loss on
the ownership interest sold. There are
two exceptions: a conveyance of oil
and gas mineral rights and a transfer
of a good or service in a contract with a
customer within the scope of ASC 606.
2
Sale or Contribution of Assets between an Investor and its Associate or Joint Venture, Amendments to IFRS 10 and IAS 28
was issued by the IASB in September 2014. In December 2015, the IASB indefinitely deferred the effective date of this
amendment. However, early adoption of this amendment is still available.
US GAAP versus IFRS The basics | 10Consolidation, joint venture accounting and equity method investees/associates
US GAAP IFRS
Equity method An investment of 20 % or more of the An investment of 20% or more of the
investments voting common stock of an investee equity of an investee (including potential
leads to a presumption that an investor rights) leads to a presumption that an
has the ability to exercise significant investor has the ability to exercise
influence over an investee, unless this significant influence over an investee,
presumption can be overcome based unless this presumption can be overcome
on facts and circumstances. based on facts and circumstances.
When determining significant When determining significant influence,
influence, potential voting rights are potential voting rights are considered if
generally not considered. currently exercisable.
When an investor in a limited When an investor has an investment in a
partnership, limited liability company limited partnership, LLC, trust or similar
(LLC), trust or similar entity with entity, the determination of significant
specific ownership accounts has an influence is made using the same general
interest greater than 3% to 5% in an principle of significant influence that is
investee, normally it accounts for its used for all other investments.
investment using the equity method.
ASC 825-10, Financial Instruments, Investments in associates held by
gives entities the option to account venture capital organizations, mutual
for certain equity method investments funds, unit trusts and similar entities
at fair value. If management does are exempt from using the equity
not elect to use the fair value option, method, and the investor may elect to
the equity method of accounting measure their investments in associates
is required. at fair value.
Conforming accounting policies Uniform accounting policies between
between investor and investee is investor and investee are required.
generally not permitted.
Joint ventures Joint ventures are generally defined Joint ventures are separate vehicles in
as entities whose operations and which the parties that have joint control
activities are jointly controlled by of the separate vehicle have rights to
their equity investors. the net assets. These rights could be
through equity investors, certain parties
with decision-making rights through
a contract.
Joint control is not defined, but it is Joint control is defined as existing when
commonly interpreted to exist when two or more parties must unanimously
all of the equity investors consent to each of the significant
unanimously consent to each of the decisions of the entity.
significant decisions of the entity.
An entity can be a joint venture, In a joint venture, the parties cannot
regardless of the rights and obligations have direct rights and obligations with
the parties sharing joint control have respect to the underlying assets and
with respect to the entity’s underlying liabilities of the entity (In this case the
assets and liabilities. arrangement would be classified as a
joint operation).
US GAAP versus IFRS The basics | 11Consolidation, joint venture accounting and equity method investees/associates
US GAAP IFRS
The investors generally account for The investors generally account for
their interests in joint ventures using their interests in joint ventures using the
the equity method of accounting. equity method of accounting.
They also can elect to account for Investments in associates held by
their interests at fair value. venture capital organizations, mutual
funds, unit trusts and similar entities are
exempt from using the equity method
and the investor may elect to measure
its investment at fair value.
Proportionate consolidation may be Proportionate consolidation is not
permitted to account for interests in permitted, regardless of industry.
unincorporated entities in certain However, when a joint arrangement
limited industries when it is an meets the definition of a joint operation
established practice (i.e., in the instead of a joint venture under IFRS, an
construction and extractive investor would recognize its share of the
industries). entity’s assets, liabilities, revenues and
expenses and not apply the equity
method.
Standard-setting activities Related Parties That Are under Common
The FASB issued ASU 2015-02, Consolidation Control, to amend the primary beneficiary
(Topic 810): Amendments to the Consolidation determination related to interests held through
Analysis, which eliminates the deferral of FAS related parties under common control. For
167, Amendments to FASB Interpretation No. PBEs, the guidance is effective for annual
46(R), and makes changes to both the variable periods beginning 15 December 2016, and
interest model and the voting model. While the interim periods therein. For all other entities,
ASU is aimed at asset managers, all reporting the effective date is consistent with that of
entities will have to re-evaluate limited ASU 2015-02.
partnerships and similar entities for consolidation In January 2017, the FASB issued ASU 2017-02,
and revise their documentation. It also may Not-for-Profit Entities — Consolidation
affect reporting entities that evaluate certain (Subtopic 958-810): Clarifying When a Not-for-
corporations or similar entities for consolidation. Profit Entity That is a General Partner or a
The guidance is now effective for PBEs. For all Limited Partner Should Consolidate a For-
other entities, it is effective for annual periods Profit Limited Partnership or Similar Entity, to
beginning after 15 December 2016 and for retain the presumption that a not-for-profit
interim periods within annual periods beginning (NFP) entity that is a general partner in a for-
after 15 December 2017. After issuing profit limited partnership or similar entity
ASU 2015-02, the FASB amended the controls the entity, unless that presumption
consolidation guidance two additional times. In can be overcome. For NFPs, the amendments
October 2016, the FASB issued ASU 2016-17, on the presumption are effective for annual
Consolidation (Topic 810): Issues Held through periods beginning after 15 December 2016,
US GAAP versus IFRS The basics | 12Consolidation, joint venture accounting and equity method investees/associates
and within interim periods after 15 December In February 2017, the FASB issued ASU 2017-
2017. Early adoption is permitted for both 05. This guidance changed the measurement of
ASU 2016-17 and ASU 2017-02, although transfers of nonfinancial assets and in
entities that have not yet adopted ASU 2015-02 substance nonfinancial assets in transactions
are required to adopt all ASUs at the same that are not with customers and that are not
time. In June 2017, the FASB proposed more businesses. It requires any noncontrolling
changes to the consolidation guidance, interest retained or received to be measured at
including allowing private companies to make fair value. This aspect of ASU 2017-05
an accounting policy election to not apply the converges US GAAP with IFRS. However, the
VIE guidance for certain common control guidance also requires all transactions in the
arrangements. It also proposed changing two scope of ASC 610-20 (including sales to equity
aspects of the VIE model for related party method investees or joint ventures) to result in
groups. Readers should monitor this project a full gain or loss. That is, there will be no intra-
for developments. Certain differences between entity profit elimination in a downstream
the consolidation guidance in IFRS and that in transaction if the sale is in the scope of
US GAAP (e.g., effective control, potential ASC 610-20. This aspect of ASU 2017-05
voting rights) continue to exist. creates a difference between US GAAP and
IFRS, because IFRS requires profit to be
In March 2016, the FASB issued ASU 2016-07,
eliminated in all downstream transactions.
Investments — Equity Method and Joint Ventures
(Topic 323): Simplifying the Transition to the In June 2016, the IASB issued an exposure draft
Equity Method of Accounting. ASU 2016-07 that would amend IFRS 3, Business Combinations,
eliminates the requirement that an investor to clarify that when an entity obtains control of
retrospectively apply equity method accounting a business that is a joint operation, it remeasures
when an investment that it had accounted for previously held interests in that business. It
by another method initially qualifies for the also would amend IFRS 11 to clarify that when
equity method. By eliminating retrospective an entity obtains joint control of a business
application of the equity method, ASU 2016-07 that is a joint operation, the entity does not
converges US GAAP with IFRS. However, remeasure previously held interests in that
measurement differences may still exist. business. In April 2017, the IASB tentatively
ASU 2016-07 is effective for all entities for decided to finalize the amendments to IFRS 3
annual periods, and interim periods within those and IFRS 11 as proposed.
annual periods, beginning after 15 December
2016. Early adoption is permitted.
US GAAP versus IFRS The basics | 13Business combinations
Business combinations
Similarities below, IFRS 3 provides an alternative to
The principal guidance for business combinations measuring noncontrolling interest at fair value
in US GAAP (ASC 805, Business Combinations) with limited exceptions. Although the standards
and IFRS (IFRS 3) are largely converged. (before the issuance of ASU 2017-01,
Pursuant to ASC 805 and IFRS 3, all business Clarifying the Definition of a Business) are
combinations are accounted for using the substantially converged, certain differences
acquisition method. When an entity obtains exist, including those with respect to the
control of another entity, the underlying definition of a business as described below.
transaction is measured at fair value, For US GAAP/IFRS accounting similarities and
establishing the basis on which the assets, differences before the adoption of ASC 606 and
liabilities and noncontrolling interests of the IFRS 15, please see the October 2016 edition.
acquired entity are measured. As described
Significant differences
US GAAP IFRS
Measurement of Noncontrolling interest is measured at Noncontrolling interest components
noncontrolling interest fair value, including goodwill. that are present ownership interests
and entitle their holders to a
proportionate share of the acquiree’s
net assets in the event of liquidation
may be measured at: (1) fair value,
including goodwill, or (2) the
noncontrolling interest’s proportionate
share of the fair value of the acquiree’s
identifiable net assets, exclusive of
goodwill. All other components of
noncontrolling interest are measured
at fair value unless another
measurement basis is required by IFRS.
The choice is available on a
transaction-by-transaction basis.
Acquiree’s operating If the terms of an acquiree operating The terms of the lease are taken into
leases for a lessor lease are favorable or unfavorable account in estimating the fair value of
(before and after the relative to market terms, the acquirer the asset subject to the lease. Separate
adoption of ASC 842, recognizes an intangible asset or recognition of an intangible asset or
Leases, and IFRS 16) liability, respectively. liability is not required.
US GAAP versus IFRS The basics | 14Business combinations
US GAAP IFRS
Assets and liabilities Initial recognition and measurement Initial recognition and measurement
arising from Assets and liabilities arising from Liabilities arising from contingencies
contingencies contingencies are recognized at fair are recognized as of the acquisition
value (in accordance with ASC 820, date if there is a present obligation that
Fair Value Measurement and arises from past events and the fair
Disclosures) if the fair value can be value can be measured reliably, even if
determined during the measurement it is not probable that an outflow of
period. Otherwise, those assets or resources will be required to settle the
liabilities are recognized at obligation. Contingent assets are not
the acquisition date in accordance with recognized.
ASC 450, Contingencies, if those
criteria for recognition are met.
Contingent assets and liabilities that
do not meet either of these recognition
criteria at the acquisition date are
subsequently accounted for in
accordance with other applicable
literature, including ASC 450. (See
“Provisions and contingencies” for
differences between ASC 450 and
IAS 37, Provisions, Contingent
Liabilities and Contingent Assets).
Subsequent measurement Subsequent measurement
If contingent assets and liabilities are Liabilities subject to contingencies are
initially recognized at fair value, an subsequently measured at the higher of:
acquirer should develop a systematic and (1) the amount that would be recognized
rational basis for subsequently measuring in accordance with IAS 37 or (2) the
and accounting for those assets and amount initially recognized less, if
liabilities depending on their nature. appropriate, the cumulative amount of
If amounts are initially recognized and income recognized in accordance with
measured in accordance with ASC 450, the principles of IFRS 15.
the subsequent accounting and
measurement should be based on
that guidance.
Combination of entities The receiving entity records the net The combination of entities under
under common control assets at their carrying amounts in common control is outside the scope of
the accounts of the transferor IFRS 3. In practice, entities either
(historical cost). follow an approach similar to US GAAP
(historical cost) or apply the acquisition
method (fair value) if there is substance
to the transaction (policy election).
US GAAP versus IFRS The basics | 15Business combinations
US GAAP IFRS
Pushdown accounting An acquired entity can choose to apply No guidance exists, and it is unclear
pushdown accounting in its separate whether pushdown accounting is
financial statements when an acquirer acceptable under IFRS. However, the
obtains control of it or later. However, general view is that entities may not
an entity’s election to apply pushdown use the hierarchy in IAS 8, Accounting
accounting is irrevocable. Polices, Changes in Accounting Estimates
and Errors, to refer to US GAAP and
apply pushdown accounting in the
separate financial statements of an
acquired subsidiary, because the
application of pushdown accounting
will result in the recognition and
measurement of assets and liabilities in
a manner that conflicts with certain
IFRS standards and interpretations. For
example, the application of pushdown
accounting generally will result in the
recognition of internally generated
goodwill and other internally generated
intangible assets at the subsidiary
level, which conflicts with the guidance
in IAS 38, Intangible Assets.
Adjustments to provisional An acquirer recognizes measurement- An acquirer recognizes measurement-
amounts within the period adjustments during the period in period adjustments on a retrospective
measurement period which it determines the amounts, basis. The acquirer revises comparative
including the effect on earnings of any information for any prior periods
amounts it would have recorded in presented, including revisions for any
previous periods if the accounting had effects on the prior-period income
been completed at the acquisition date. statement.
Definition of a business Definition of a business Definition of a business
after the adoption of A business must include, at a minimum, A business consists of inputs and
ASU 2017-01 an input and a substantive process that processes applied to those inputs that
together significantly contribute to the have the ability to create outputs.
ability to create outputs. Although businesses usually have
An output is the result of inputs and outputs, outputs are not required for
processes applied to those inputs that an integrated set to qualify as a
provide goods or services to business. The term “substantive
customers, investment income (such as process” is not defined in IFRS 3.
dividends or interest, or other An integrated set of activities and
revenues. That is, the focus is on assets requires two essential elements —
revenue-generating activities, which inputs and processes applied to those
more closely aligns the definition with inputs, which together are or will be
the description of outputs in the new used to create outputs. However, a
revenue guidance in ASC 606. business does not have to include all of
the inputs or processes that the seller
used in operating that business if
market participants are capable of
US GAAP versus IFRS The basics | 16Business combinations
US GAAP IFRS
An entity does not need to evaluate acquiring the business and continuing
whether any missing elements could be to produce outputs, for example, by
replaced by a market participant. integrating the business with their own
inputs and processes.
Outputs are defined as the result of
inputs and processes applied to those
inputs that provide or have the ability
to provide a return in the form of
dividends, lower costs or other economic
benefits directly to investors or other
owners, members or participants.
Threshold test Threshold test
An entity must first evaluate whether There is no threshold test under IFRS 3.
substantially all of the fair value of the
gross assets acquired is concentrated
in a single identifiable asset or group of
similar identifiable assets. If that
threshold is met, the set is not a
business and does not require further
evaluation. Gross assets acquired
should exclude cash and cash
equivalents, deferred tax assets and
any goodwill that would be created in a
business combination from the
recognition of deferred tax liabilities.
Other differences may arise due to different Standard-setting activities
accounting requirements of other existing
The FASB and the IASB issued substantially
US GAAP and IFRS literature (e.g., identifying converged standards in December 2007 and
the acquirer, definition of control, replacement
January 2008, respectively. Both boards have
of share-based payment awards, initial completed post-implementation reviews of
classification and subsequent measurement of
their respective standards and separately
contingent consideration, initial recognition and discussed several narrow-scope projects.
measurement of income taxes, initial recognition
and measurement of employee benefits). In January 2017, the FASB issued ASU 2017-01
to clarify certain aspects of the definition of
a business.
In June 2016, the IASB issued an exposure
draft on the definition of a business as a result
of concerns raised in its post-implementation
review about the complexity of its application.
In addition, the IASB has a research project on
business combinations of entities under
common control.
US GAAP versus IFRS The basics | 17Inventory
Inventory
Similarities Permissible techniques for cost measurement,
ASC 330, Inventory, and IAS 2, Inventories, such as the retail inventory method (RIM), are
are based on the principle that the primary similar under both US GAAP and IFRS. Further,
basis of accounting for inventory is cost. Both under both sets of standards, the cost of
standards define inventory as assets held for inventory includes all direct expenditures to
sale in the ordinary course of business, in the ready inventory for sale, including allocable
process of production for such sale or to be overhead, while selling costs are excluded from
consumed in the production of goods or services. the cost of inventories, as are most storage
costs and general administrative costs.
Significant differences
US GAAP IFRS
Costing methods Last in, first out (LIFO) is an acceptable LIFO is prohibited. Same cost formula
method. A consistent cost formula for must be applied to all inventories
all inventories similar in nature is not similar in nature or use to the entity.
explicitly required.
Measurement Before the adoption of ASU 2015-11, Inventory is carried at the lower of cost
Inventory (Topic 330): Simplifying the and net realizable value. Net realizable
Measurement of Inventory, inventory is value is defined as the estimated selling
carried at the lower of cost or market. price less the estimated costs of
Market is defined as current replacement completion and the estimated costs
cost, but not greater than net realizable necessary to make the sale.
value (estimated selling price less
reasonable costs of completion, disposal
and transportation) and not less than
net realizable value reduced by a normal
sales margin.
After the adoption of ASU 2015-11,
inventory other than that accounted for
under the LIFO or RIM is carried at the
lower of cost and net realizable value.
Reversal of inventory Any write-down of inventory below cost Previously recognized impairment losses
write-downs creates a new cost basis that are reversed up to the amount of the
subsequently cannot be reversed. original impairment loss when the reasons
for the impairment no longer exist.
Permanent inventory Permanent markdowns do not affect Permanent markdowns affect the
markdowns under RIM the gross margins used in applying the average gross margin used in applying
RIM. Rather, such markdowns reduce the RIM. Reduction of the carrying cost
the carrying cost of inventory to net of inventory to below the lower of cost
realizable value, less an allowance for and net realizable value is not allowed.
an approximately normal profit margin,
which may be less than both original
cost and net realizable value.
US GAAP versus IFRS The basics | 18Inventory
US GAAP IFRS
Capitalization of pension After the adoption of ASU 2017-07, Any post-employment benefit costs
costs Improving the Presentation of Net included in the cost of inventory
Periodic Pension Cost and Net Periodic include the appropriate proportion of
Postretirement Benefit Cost, the service the components of defined benefit cost
cost component of net periodic pension (i.e., service cost, net interest on the
cost and net periodic postretirement net defined benefit liability (asset) and
benefit cost is the only component remeasurements of the net defined
directly arising from employees’ services benefit liability (asset).
provided in the current period.
Therefore, when it is appropriate to
capitalize employee compensation in
connection with the construction or
production of an asset, the service cost
component applicable to the pertinent
employees for the period is the relevant
amount to be considered for
capitalization. (ASU 2017-07 is effective
for PBEs in annual periods beginning
after 15 December 2017, and interim
periods within those annual periods. For
all other entities, it is effective for annual
periods beginning after 15 December
2018, and interim periods within annual
periods beginning after 15 December
2019. Early adoption is permitted.)
Standard-setting activities
In July 2015, the FASB issued ASU 2015-11,
which requires that inventories, other than
those accounted for under the LIFO method or
RIM, be measured at the lower of cost and net
realizable value. The guidance is effective for
PBEs for annual periods beginning after
15 December 2016, and interim periods within
those annual periods. For all other entities, it is
effective for annual periods beginning after
15 December 2016, and interim periods within
annual periods beginning after 15 December
2017. Early adoption is permitted as of the
beginning of an interim or annual reporting
period. This ASU will generally result in
convergence in the subsequent measurement
of inventories other than those accounted for
under the LIFO method or RIM.
US GAAP versus IFRS The basics | 19Long-lived assets
Long-lived assets
Similarities Depreciation
Although US GAAP does not have a Depreciation of long-lived assets is required
comprehensive standard that addresses long- on a systematic basis under both accounting
lived assets, its definition of property, plant and models. ASC 250, Accounting Changes and
equipment is similar to IAS 16, Property, Plant Error Corrections, and IAS 8 both treat changes
and Equipment, which addresses tangible in residual value and useful economic life as
assets held for use that are expected to be used a change in accounting estimate requiring
for more than one reporting period. Other prospective treatment.
concepts that are similar include the following: Assets held for sale
Cost Assets held for sale criteria are similar in the
Both accounting models have similar Impairment or Disposal of Long-Lived Assets
recognition criteria, requiring that costs be subsections of ASC 360-10, Property, Plant and
included in the cost of the asset if future Equipment (and in ASC 205-20, Presentation of
economic benefits are probable and can be Financial Statements — Discontinued Operations),
reliably measured. Neither model allows the and IFRS 5, Non-current Assets Held for Sale
capitalization of start-up costs, general and Discontinued Operations. Under both
administrative and overhead costs or regular standards, the asset is measured at the lower
maintenance. Both US GAAP and IFRS require of its carrying amount or fair value less costs to
that the costs of dismantling an asset and sell, the assets are not depreciated and they
restoring its site (i.e., the costs of asset are presented separately on the face of the
retirement under ASC 410-20, Asset balance sheet. Exchanges of nonmonetary
Retirement and Environmental Obligations — similar productive assets are also treated
Asset Retirement Obligations or IAS 37) be similarly under ASC 845, Nonmonetary
included in the cost of the asset when there is Transactions, and IAS 16, both of which allow
a legal obligation, but IFRS requires provision gain or loss recognition if the exchange has
in other circumstances as well. commercial substance and the fair value of the
exchange can be reliably measured.
Capitalized interest
ASC 835-20, Interest — Capitalization of
Interest, and IAS 23, Borrowing Costs,
require the capitalization of borrowing costs
(e.g., interest costs) directly attributable to
the acquisition, construction or production of
a qualifying asset. Qualifying assets are
generally defined similarly under both
accounting models. However, there are
differences between US GAAP and IFRS in
the measurement of eligible borrowing costs
for capitalization.
US GAAP versus IFRS The basics | 20Long-lived assets
Significant differences
US GAAP IFRS
Revaluation of assets Revaluation is not permitted. Revaluation is a permitted accounting
policy election for an entire class of
assets, requiring revaluation to fair
value on a regular basis.
Depreciation of asset Component depreciation is permitted, Component depreciation is required if
components but it is not common. components of an asset have differing
patterns of benefit.
Measurement of Eligible borrowing costs do not include Eligible borrowing costs include
borrowing costs exchange rate differences. Interest exchange rate differences from foreign
earned on the investment of borrowed currency borrowings to the extent that
funds generally cannot offset interest they are regarded as an adjustment to
costs incurred during the period. interest costs.
For borrowings associated with a For borrowings associated with a
specific qualifying asset, borrowing specific qualifying asset, actual
costs equal to the weighted-average borrowing costs are capitalized offset
accumulated expenditures times the by investment income earned on those
borrowing rate are capitalized. borrowings.
Costs of a major Multiple accounting models have evolved Costs that represent a replacement of
overhaul in practice for entities in the airline a previously identified component of an
industry, including expense costs as asset are capitalized if future economic
incurred, capitalize costs and amortize benefits are probable and the costs can
through the date of the next overhaul, be reliably measured. Otherwise, these
or follow the built-in overhaul approach costs are expensed as incurred.
(i.e., an approach with certain
similarities to composite depreciation).
Investment property Investment property is not separately Before the adoption of IFRS 16,
defined and, therefore, is accounted investment property is separately
for as held and used or held for sale. defined in IAS 40, Investment Property,
as property held to earn rent or for
capital appreciation (or both) and may
include property held by lessees under a
finance or operating lease. Investment
property may be accounted for on a
historical cost basis or on a fair value
basis as an accounting policy election.
Capitalized operating leases classified as
investment property must be accounted
for using the fair value model.
US GAAP versus IFRS The basics | 21Long-lived assets
US GAAP IFRS
After the adoption of IFRS 16,
investment property is separately
defined in IAS 40 as property held to
earn rent or for capital appreciation (or
both) and may include property held by
lessees as right-of-use assets.
Investment property may be accounted
for on a historical cost or fair value basis
as an accounting policy election. IFRS
16 requires a lessee to measure right-of-
use assets arising from leased property
in accordance with the fair value model
of IAS 40 if the leased property meets
the definition of investment property
and the lessee elects the fair value
model in IAS 40 as an accounting policy.
Other differences include: hedging gains and
losses related to the purchase of assets,
constructive obligations to retire assets, the
discount rate used to calculate asset retirement
costs and the accounting for changes in the
residual value.
Standard-setting activities
There is currently no standard-setting activity
in this area.
US GAAP versus IFRS The basics | 22Intangible assets
Intangible assets
Similarities Amortization of intangible assets over their
Both US GAAP (ASC 805 and ASC 350, estimated useful lives is required under both
Intangibles — Goodwill and Other) and IFRS US GAAP and IFRS, with one US GAAP minor
(IFRS 3 and IAS 38) define intangible assets as exception in ASC 985-20, Software — Costs of
nonmonetary assets without physical Software to be Sold, Leased or Marketed,
substance. The recognition criteria for both related to the amortization of computer
accounting models require that there be software sold to others. In both sets of
probable future economic benefits from costs standards, if there is no foreseeable limit to
that can be reliably measured, although some the period over which an intangible asset is
costs are never capitalized as intangible assets expected to generate net cash inflows to the
(e.g., start-up costs). Goodwill is recognized entity, the useful life is considered to be
only in a business combination. With the indefinite and the asset is not amortized.
exception of development costs (addressed Goodwill is never amortized under either
below), internally developed intangibles are not US GAAP or IFRS.
recognized as assets under either ASC 350 or For US GAAP/IFRS accounting similarities and
IAS 38. Moreover, internal costs related to the differences before the adoption of ASC 606 and
research phase of research and development IFRS 15, please see the October 2016 edition.
are expensed as incurred under both
accounting models.
Significant differences
US GAAP IFRS
Development costs Development costs are expensed as Development costs are capitalized
incurred unless addressed by guidance when technical and economic feasibility
in another ASC Topic. Development of a project can be demonstrated in
costs related to computer software accordance with specific criteria,
developed for external use are including: demonstrating technical
capitalized once technological feasibility feasibility, intent to complete the asset
is established in accordance with and ability to sell the asset in the
specific criteria (ASC 985-20). In the future. Although application of these
case of software developed for internal principles may be largely consistent
use, only those costs incurred during with ASC 985-20 and ASC 350-40,
the application development stage (as there is no separate guidance
defined in ASC 350-40, Intangibles — addressing computer software
Goodwill and Other — Internal-Use development costs.
Software) may be capitalized.
Advertising costs Advertising and promotional costs are Advertising and promotional costs are
either expensed as incurred or expensed as incurred. A prepayment
expensed when the advertising takes may be recognized as an asset only
place for the first time (policy choice). when payment for the goods or
services is made in advance of the
entity having access to the goods or
receiving the services.
US GAAP versus IFRS The basics | 23You can also read
