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IFRS And U.S. GAAP: A Financial Statement Comparison


Significant differences in accounting rules affect valuation of companies and their equity.

IFRS and GAAP are the two major systems.

Other systems are used elsewhere, notably in China.

Significant differences between the two major accounting systems represent substantial variances in equity levels as well as net profit.

Balance sheet

Under IFRS, there is no specific prescribed format for reporting assets or liabilities. However, IFRS requires reporting of:

Assets: Property, plant and equipment (PPE), investment properly, financial assets, intangible assets, and assets valued on the equity method (accounting based on earnings from investments in other companies). Also reported are current assets including inventories, receivables, and assets held for sale or disposal.

Equity and Liabilities: Reported in these sections are shares issued, minority equity interests, financial liabilities, current and deferred tax liabilities, and accounts payable,

Under GAAP, the balance sheet has two sides. The total of assets equals the combined total of liabilities and net worth. However, rather than being presented in the order of increasing liquidity (as in IFRS), the GAAP system generally presents in a decreasing order of liquidity (current first and long-term next).

Distinctions between current and non-current items: Under IFRS, current assets include assets held for sale or used I n the normal operating cycle; and cash or cash equivalents. Both assets and liabilities are current if realized or due within 12 months. In the GAAP system, requirements are similar to IFRS in most respects. The question of whether liabilities are defined as current or long-term depends in both systems on whether repayments are renegotiated to extend repayment terms.

Offsetting assets and liabilities: Under IFRS offsets are not allowed in most cases. Under GAAP, offsetting is allowed when the amounts owed and receivable are specific and easily determined.

In the equity section of the balance sheet, minority interests are not treated in the same manner. Under IFRS, minority interests are classified as equity. Under GAAP, minority interests cannot be listed as a component of equity.

Income statement

Under IFRS, there is no specific format requirement for reporting revenue, costs, expenses and earnings. However, the minimum requirement is to present revenue, finance costs, post-tax joint venture results, method, tax expense, after-tax gain or loss from discontinued operations, and profit or loss for the period. Profit or loss attributed to minority interests and parent company are disclosed separately.

In the GAAP approach, one of two formats may be used. The single-step format involves listing expenses and deducting the total from gross income to arrive at pre-tax income. The second format begins with revenue, deducts cost of sales to arrive at gross profit, and then expenses are listed and deducted to arrive at pre-tax income.

Significant exceptions: Under IFRS, separate disclosure of parent and minority profit or loss is preferred over the use of “extraordinary items.” In GAAP, significant exceptional items are disclosed separately from other items, and explained in footnotes.

Both format and valuation are affected by the rules under each system. One of the most significant valuation issues is valuation of land and buildings. Under IFRS, adjustments to asset value may be made to reflect current market value. Under GAAP, all capital assets must be listed at original basis, minus accumulated depreciation.

These are some of the highlights in differences between the two systems. Attempts to reconcile the two systems become complex when the more advanced valuation and reporting assumptions are taken into consideration.

Complicating this discussion is the expansion of many once domestic-only companies into multi-country enterprises. With different accounting systems in use in each country, valuation and reporting has become more difficult, not less.

IFRS standards are determined by the International Accounting Standards Board (IASB), and GAAP rules are determined by the Financial Accounting Standards Board (FASB).

Beyond these systems, several variations are used elsewhere. In China, Chinese GAAP, also known as Chinese Accounting Standards (CAS) is widely used. This system is required for filing of all financial reports. Hong Kong makes its own adjustments and uses the Hong Kong Financial Reporting Standards (HKFRS); and Singapore also has its own accounting rules, defined within the Singapore Financial Reporting Standards (SFRS).