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Department of Accounting & Information Systems Faculty of Business Studies University of Dhaka

An assignment on

Similarities and Differences between IFRS and US GAAP.

Course Name: Corporate Financial Reporting and Financial Statement Analysis (7101).

Prepared For:
Mohammad Moniruzzaman, ACA Lecturer Department of Accounting & Information Systems University of Dhaka.

Prepared by:
Fahmida Akter ID#14026 Section: A MBA 14th Batch Department of Accounting & Information Systems

Prepared by: Md.Al-amin


ID#14032 Section: A MBA 14th Batch Department of Accounting & Information Systems

University of Dhaka.

University of Dhaka.

Date of Submission: 12 January 2013.

Introduction: IFRS (International Financial Reporting Standards) is the term used to indicate
the whole body of IASB authoritative literature. On the other hand, US GAAP (Generally Accepted Accounting Principles) is the term used to indicate the body of authoritative literature that comprises accounting and reporting standards in the United States (KPMG, 2012). Although US companies will not be permitted to use IFRS for US public filings in the foreseeable future, IFRS has been affecting US companies for some time, primarily through engaging in crossborder merger-and-acquisition (M&A) activity, meeting the reporting needs of non-US stakeholders, and assisting with or monitoring of the IFRS requirements of non-US subsidiaries(PWC, 2012).

Similarities and Differences between IFRS and US GAAP: Similarities and


differences between IFRS and US GAAP are discussed form different categorical views:

1. Accounting framework:
Similarities: Similarities between IFRS and US GAAP are:

I. II.

Both the frameworks are similar in their purpose to assist in developing and assisting standards. Entities may, in rare cases, override the standards where essential to give a fair Presentation.

Differences: Differences are given below: Nos 1 SUBJECT Approach IFRS Principles based approach. US GAAP Rules based approach in the past but moving towards adopting object oriented approach. 2 Design IFRS is designed for used by Unlike IFRS profit-oriented business. US GAAP is

designed for used by both profit oriented entities. and not-for-profit

Prioritization

of Management

is

explicitly The FASB framework resides

Framework

required to prioritize the IASB lower in hierarchy. Management framework standard available. if or there is no is not required to prioritize it if

interpretation no standard is available.

Underlying assumptions

Give importance to accrual and Although it recognizes, but not going concern basis given much prominence is given to accrual and going concern basis. In fact going concern assumption is not well developed in particular.

Historical cost

Generally uses historical cost, No

revaluations types

except of

for

but intangible assets, property certain

financial

plant and equipment (PPE) and instrument. investment property may be revalued to fair value.

Derivatives, biological assets and certain securities are

revalued to fair value.

2. Financial statements presentation:


Similarities: There are many similarities in US GAAP and IFRS guidance on financial statement presentation. These are presented in below: I. Under both frameworks, the components of a complete set of financial statements include: balance sheet, income statement, other comprehensive income, cash flows and notes to the financial statements, only in mere changes. II. Both US GAAP and IFRS also require that the financial statements be prepared on the accrual basis of accounting (with the exception of the cash flow statement) except for rare circumstances. III. Both sets of standards have similar concepts regarding materiality and consistency that entities have to consider in preparing their financial statements.
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Differences: Differences between the two sets of standards tend are given in below: NOs 1

SUBJECT Financial periods required

IFRS

US GAAP comparative statements are

Comparative information must Generally, be disclosed with respect to the financial

previous period for all amounts presented; however, a single reported statements. in the financial year may be presented in certain circumstances. Public

companies must follow SEC rules, which typically require balance sheets for the two most recent years, while all other statements must cover the threeyear period ended on the

balance sheet date. 2 Layout of balance IAS 1, Presentation of Financial No general requirement within sheet and statement Statements, does not prescribe a US GAAP to prepare the and income

income standard layout, but includes a balance

sheet

list of minimum items. These statement in accordance with a minimum prescriptive items are less specific layout; however, public the companies detailed must follow the in

than

requirements in Regulation S-X.

requirements

Regulation S-X. 3 Presentation debt versus current in of Debt associated with a covenant Debt for which there has been a violation may be

as current violation must be presented as covenant non- current unless the

lender presented as non-current if a

the agreement was reached prior to lender agreement to waive the the balance sheet date. right to demand repayment for more than one year exists prior to the issuance of the financial
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balance sheet

statements. 4 Classification of All amounts classified as non- Current deferred tax assets and current in the balance sheet. or non-current based on the

classification,

nature of the related asset or liability, is required.

liabilities in balance sheet 5

Income statement Entities may present expenses SEC registrants are required to classification of expenses based on either function or present nature (e.g., expenses based on

salaries, function (e.g., cost of sales, if administrative).

depreciation). function is

However, selected,

certain

disclosures about the nature of expenses must be included in the notes. 6 Third sheet balance A third balance sheet (and Not required. related notes) are required as of the beginning of the earliest comparative period presented its or

when an entity restates financial statements

retrospectively applies a new accounting policy.

3. Interim financial reporting:


Similarities: Similarities between IFRS and US GAAP are: I. Both standards allow for condensed interim financial statements and provide for similar disclosure requirements. II. Neither standard requires entities to present interim financial information.

Differences: Differences are given below: NOs SUBJECT 1 Treatment certain costs periods in IFRS US GAAP

of Each interim period is viewed as a Each interim period is viewed discrete reporting period. A cost as an integral part of an interim that does not meet the definition of annual period. As a result, an asset at the end of an interim certain costs that benefit more period is not deferred, and a than one interim period may liability recognized at an interim be allocated among those reporting date must represent an periods, resulting in deferral existing obligation. Income taxes or accrual of certain costs. are accounted for based on an annual effective tax rate.

4. Consolidation, Joint venture accounting and equity method investment:


Similarities: Similarities between IFRS and US GAAP are: I. Under both US GAAP and IFRS, the determination of whether entities are consolidated by a reporting entity is based on control, although differences exist in the definition of control. II. Under both sets of standards, the consolidated financial statements of the parent and its subsidiaries may be based on different reporting dates as long as the difference is not greater than three months.

Differences: Differences are given below NOs SUBJECT 1 Consolidation model IFRS US GAAP is on controlling

Focus is on the power to control, Focus with control defined as

the financial interests. All entities

parents ability to govern the are first evaluated as potential financial and operating policies of VIEs. If a VIE, the applicable an entity to obtain benefits. guidance in ASC 810 is (below). Entities
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Control is presumed to exist if the followed

parent owns more than 50% of the controlled by voting rights are votes, and potential voting rights consolidated as subsidiaries, must be considered. but potential voting rights are not included in this

consideration. 2 Equity method investments In determining significant Potential voting rights are

influence, potential voting rights generally not considered in are considered if currently the determination of

exercisable. 3 Joint ventures IAS 31, Interests permits in either

significant influence. Joint Generally accounted for using the the equity method of

Ventures,

proportionate

consolidation accounting, with the limited

method or the equity method of exception of unincorporated accounting. entities operating in certain industries, which may follow proportionate consolidation.

5. Inventory:
Similarities: Similarities between IFRS and US GAAP are: I. ASC 330, Inventory, and IAS 2, Inventories, are based on the principle that the primary basis of accounting for inventory is cost. II. Both define inventory as assets held for sale in the ordinary course of business, in the process of production for such sale or to be consumed in the production of goods or services. III. Permissible techniques for cost measurement, such as retail inventory method, are similar under both US GAAP and IFRS. Differences: Differences are given below: NOs 1 SUBJECT Costing methods IFRS US GAAP is an acceptable cost
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LIFO is prohibited. Same cost LIFO formula must be applied to all method.

Consistent

inventories similar in nature or formula for all inventories use to the entity. similar in nature is not

explicitly required. 2 Measurement Inventory is carried at the lower Inventory is carried at the of cost or net realizable value. Net lower of cost or market. realizable value is defined as the Market is defined as current best estimate of the net amount replacement inventories realize. are expected cost, but not

to greater than net realizable value (estimated selling price less reasonable costs of

completion and sale) and not less than net realizable value reduced by a normal sales margin. 3 Reversal inventory write-downs of Previously recognized Any write-down of inventory

impairment losses are reversed up to the lower of cost or market to the amount of the original creates a new cost basis that impairment loss when the reasons subsequently for the impairment no longer reversed. exist. cannot be

6. Long-lived assets:
Similarities: Similarities between IFRS and US GAAP are: I. Both accounting models have similar recognition criteria, requiring that costs be included in the cost of the asset if future economic benefits are probable and can be reliably measured. II. Neither model allows the capitalization of start-up costs, general administrative and overhead costs or regular maintenance. III. 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.
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Differences: Differences are given below: NOs SUBJECT 1 Revaluation assets IFRS of Revaluation is a US GAAP permitted Revaluation not permitted.

accounting policy election for an entire class of assets, requiring revaluation to fair value on a regular basis.

7. Intangible Assets:
Similarities: Both US GAAP (ASC 805, Business Combinations, and ASC 350, Intangibles Goodwill and Other) and IFRS (IFRS 3(R), Business Combinations, and IAS 38, Intangible Assets) define intangible assets as nonmonetary assets without physical substance. The recognition criteria for both accounting models require that there be probable future economic benefits and costs that can be reliably measured, although some costs are never capitalized as intangible assets (e.g., start-up costs). Internal costs related to the research phase of research and development is expensed as incurred under both accounting models. Differences: Differences are given below: NOs SUBJECT 1 Development costs IFRS US GAAP costs are

Development costs are capitalized Development

when technical and economic expensed as incurred unless feasibility of a project can be addressed by guidance in

demonstrated in accordance with another ASC Topic. specific criteria. 2 Allocation goodwill of Goodwill is allocated to a cash- Goodwill is allocated to a generating unit (CGU) or group of reporting unit, as an which is

CGUs that represents the lowest defined level within the entity at which the segment. goodwill is monitored for internal management purposes and cannot be larger than an operating

operating

segment as defined in IFRS 8, Operating Segments.

8. Provisions and contingencies:


Similarities: I. Both US GAAP and IFRS require recognition of a loss based on the probability of occurrence. II. Both US GAAP and IFRS require disclosures about a contingent liability whose occurrence is more than remote but does not meet the recognition criteria. Differences: Differences are given below: NOs SUBJECT 1 Disclosure contingent liability IFRS US GAAP

of No similar provision to that Reduced disclosure permitted allowed under IFRS for reduced if disclosure requirements. it would to be an severely entitys prejudicial

position in a dispute with other parties.

9. Revenue recognition:
Similarities: Similarities are given below: I. Revenue recognition under both US GAAP and IFRS is tied to the completion of the earnings process and the realization of assets from such completion. II. Under both US GAAP and IFRS, revenue is not recognized until it is both realized (or realizable) and earned. Differences: Differences are given below: NOs SUBJECT 1 Sale of goods IFRS US GAAP

Revenue is recognized only when Public companies must follow risks and rewards of ownership SAB 104, Revenue

have been transferred, the buyer Recognition, which requires

has control of the goods, revenues that delivery has occurred (the can be measured reliably and it is risks probable that the and rewards have there of been is

economic ownership transferred),

benefits will flow to the company.

persuasive evidence of the sale, the fee is fixed or determinable collectability assured.. is and reasonably

Conclusion: IFRS and US GAAP are significantly different. On the mean time, these two
reporting standards have several similarities. Convergence project is undertaken to keep these standards under same umbrella to ensure uniform set of standard throughout the world.

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References:
IFRS and US GAAP: similarities and differences, PWC (October, 2012) IFRSs and US GAAP: A pocket comparison, Deloitte (July, 2008) IFRS compared to US GAAP: An Overview, KPMG (October 2012) US GAAP versus IFRS: The basics, Ernst and Young (December 2011)

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