IFRS vs. GAAP

ACCO 605DATE: 2/08/2010

JOSE CINTRON,MBA

IFRS Versus FASB Standards

IFRS: More 'principles-based' standards with limited application

guidance.

GAAP: More 'rule-based' standards with more specific application guidance.

Most Differences are Not in Writing

Since US GAAP is much more detailed and specific there are many contractual clauses that are covered in US GAAP that are not addressed in writing in IFRS.

International auditors sometimes, but not always, look to US GAAP when IFRS is silent about a particular issue.

IAS 1 Comprehensive Income

IFRS: Statement of changes in equity is required. A grand total of "comprehensive income" is permitted but not required.

GAAP: Must present grand total of "comprehensive income". Can present in income statement, statement of comprehensive income, or changes in equity.

IAS 1 Extraordinary Items

IFRS: Prohibited.

US: Extraordinary items are permitted but restricted to items that are both infrequent in occurrence and unusual in nature.

IAS 2 Method for determining inventory cost

IFRS: LIFO is prohibited.

US: LIFO is permitted.

IAS 32 Classification of convertible debt instruments by the issuer

IFRS: Split the instrument into its liability and equity components

at issuance.

GAAP: Classify the entire instrument as a liability. However, the intrinsic value of the conversion feature at the commitment date of the instrument, if any, is recognized as additional paid-in capital.

IAS 39 Basis Adjustment IFRS:

Fair value hedge: Required.Cash flow hedge of a transaction resulting in a financial asset or liability: Same as US GAAP.

Cash flow hedge of a transaction resulting in a non-financial asset or liability: Choice of US GAAP or basis adjustment.

GAAP:Fair value hedge: Required.

Cash flow hedge of a transaction resulting in an asset or liability: Gain/loss on hedging instrument that had been reported in equity remains in equity and is reclassified into earnings in the same period the acquired asset or incurred liability affects earnings.

IAS 39 Hedging gain or loss on net investment in a foreign entity

IFRS: The portion determined to be an effective hedge is

recognized in equity.

GAAP: Gains and losses relating to hedge ineffectiveness is recognized in profit or loss immediately.

IAS 39 Macro Hedging

IFRS: Fair value hedge accounting treatment for a portfolio

hedge of interest rate risk is allowed if certain specified conditions are met.

GAAP: Hedge accounting treatment is prohibited, though similar results may be achieved by designating specific assets or liabilities as hedged items.

IAS 39 Use of "partial-term hedges"

(hedge of a fair value exposure for only a part of the term of a hedged item)

IFRS: Allowed.

GAAP: Prohibited.

IAS 39 Hedging foreign currency risk in a held-to-maturity investment

IFRS: Can qualify for hedge accounting.

GAAP: Cannot qualify for hedge accounting.

IAS 39 Hedging foreign currency risk in a firm commitment to acquire a business in a business

combination

IFRS: Can qualify for hedge accounting.

GAAP: Cannot qualify for hedge accounting.

IAS 39 Option to designate any financial asset or financial liability to be measured at fair value

through profit or loss

IFRS: Option is allowed.

GAAP: No such option.

IAS 39 Option to designate loans and receivables as available for sale to be measured at fair value

through equity

IFRS: Option is allowed.

GAAP: No such option.

Investments in unlisted equity instruments

IFRS: Measured at fair value if reliably measurable;

otherwise at cost.

GAAP: Measured at cost.

IAS 39 Measurement of derivatives IFRS: All derivatives are measured at fair value except that

a derivative that is linked to and must be settled by delivery of an unquoted equity instrument whose fair value cannot be reliably measured is measured at cost.

GAAP: All derivatives are measured at fair value.

IAS 39 Multiple embedded derivatives in a single hybrid instrument

IFRS: Sometimes accounted for separately.

GAAP: Always treated as a single compound embedded derivative.

IAS 39 Reclassification of financial instruments into or out of the trading category

IFRS: Prohibited.

GAAP: Permitted, but generally transfers into or from the trading category should be rare.

IAS 39 Held-to-Maturity Classification

IFRS: Prohibited from using held-to-maturity classification for the next two years.

GAAP: Prohibited from using held-to-maturity classification. SEC indicates that prohibition is generally for two years.

IAS 39 Subsequent reversal of an impairment loss

IFRS: Required for loans and receivables, held-to-maturity, and available-for-sale debt instruments if certain criteria are met.

GAAP: Prohibited for held-to-maturity and available-for-sale securities. Reversal of valuation allowances on loans is recognized in the income statement.

IAS 39 Derecognition of financial assets

IFRS: Combination of risks and rewards and control approach. Can derecognize part of an asset. No "isolation in bankruptcy" test. Partial derecognition allowed only if specific criteria are complied with.

GAAP: Derecognize assets when transferor has surrendered control over the assets. One of the conditions is legal isolation in bankruptcy. No partial derecognition.

IAS 39 Use of "Qualifying SPEs"

IFRS: No such category of SPEs.

GAAP: Necessary for derecognition of financial assets if transferee is not free to sell or pledge transferred assets.