Accounting Treatment and the Differences Between IFRS and US GAAP

IFRS is the International Finance Regulation Standards as defined by the International Accounting Standards Board. On the other hand, US GAAP is defined as the Generally Accepted Accounting Principles. These are a collection of accounting guidelines and practices which are used in the accounting community.

Accounting treatment

As far as revenue recognition is concerned, IFRS is not very much industry-specific as compared to US GAAP, which is very much recognized in the accounting industry. The two also differ in the way they react to matters relating to the recognition of expenses.

This is generally in respect to the period of time, as well as how much expense, a particular company can recognize. As far as financial instruments are concerned, US GAAP actually tends to recognize the instruments as equity, whereas IFRS will recognize these financial instruments as debts. US GAAP restricts itself to the use of LIFO (last in; first-out inventory practice) as a method of inventory costing, whereas in IFRS, there is no use of LIFO as a method of inventory costing. In the area of accounting standards, US GAAP is always synonymous with accounting principles, whereas IFRS is well versed with accounting policy.

As far as the definition of goodwill is concerned, IFRS takes that it is represented by the value difference when the cost of acquiring commodities as compared to the “interest in the net fair value of the identifiable assets, liabilities and contingent liabilities” (Jerman and Massimo, 2008). However, issues of cost savings have arisen regarding the inclusion of intangible assets (Lev, 2001; cited in Jerman and Massimo, 2008). Banegil and Sanguino (2007) note that there lacks an adequate approach to measuring them.

On the other side, GAAP takes the definition of goodwill as “the excess of the cost of an acquisition price over the fair value of acquired net assets” (Jerman and Massimo, 2008). For the case of indication of added impairment, the impairment is determined “annually or more frequently” for the case of the IFRS (Jerman and Massimo, 2008), whereas it is considered similarly in the GAAP. Thus, the two link up in this case.

In the case of negative goodwill, GAAP and IFRS agree on the principle that “any discount on acquisition is taken to the profit and loss statement” (Jerman and Massimo, 2008).

US GAAP will consider taking a longer time than IFRS in matters relating to the recognition of the expense of stock option, which in fact, has vesting over a specific time-lapse. As far as financial liability and equity are concerned, we have got differences between the US GAAP and IFRS whereby, the instruments which previously US GAAP took as equity, IFRS, will treat them as debits. The criteria for consolidation are many in the US GAAP, but on the side of IFRS, the consolidation of a company is always based on the extent of the power which it is capable of putting into practice based on the financial and operational policies.

During the time of adoption, there are specific standards for IFRS that have detailed guidelines for the first time in the IFRS, but in US GAAP, there are no specific standards. For the GAAP, there is no permitting of reversals for the case of losses occurring from impairment. The same also applies to IFRS. Another difference occurs for the method of testing, where GAAP implements two steps, but the IFRS does not allow the use of the two processes (Jerman and Massimo, 2008).

Clearer reporting standards for the financial information may lead to improved transparency (Sevin et al., 2007; cited in Jerman and Massimo, 2008) and it is necessary to assign goodwill to report unites to feature as many operations as well through assumptions and projections (Zhang, 2008; Sevin and Schroeder (2005; cited Jerman and Massimo, 2008).

There are also differences in terms of the basis of consolidation whereby, in IFRS, it is always based on the control and will take into account the governance and economics; but in US GAAP, the general approach is basically on the majority voting interests. Accounting policies have some variations between the IFRS and US GAAP.

In this case, the former must conform to the policies whereas, in the latter, the condition of adhering to the conformity of policies is not applicable. The parent together with the subsidiaries has variations as far as reporting dates are concerned. For IFRS, the date for reporting is basically within three months and must strictly adjust to the significant differences. But for the US GAAP, the date for reporting should be three months although it must strictly disclose significant differences.

The minority differences are represented. In IFRS, it must be within equity between the liabilities and equity, whereas in the US GAAP, it is outside of equity all the time between the liabilities and equity.

Another major difference arises in the potential voting rights. This is whereby, in IFRS, it is exercised in consideration of the assessing control, whereas, in the US GAAP, this is not considered until it is actually exercised. The general approach is completely different. For the IFRS, this approach is through highly principle-based standards whose guidance for application is in fact, limited; but for the US GAAP, the general approach has standards which are obviously rule-based.

The initial adoption also comes with some differences, where the IFRS goes with general principle, which has basically full-retrospective application. There is always no given specific standard for the US GAAP. For the compensation of the cost capitalization, IFSR will give room for it, subject to the requirements of various IFRSs, whereas, US GAAP, will give room for compensation, but subject to other requirements of US GAAP-which will actually be different from IFRS.

The share-based payment arrangement in statement of financial position of the company is classified with variation between the two, whereby, in the IFRS, it will always focus on whether an award can be settled using cash. But for the US GAAP, there are always plenty of detailed requirements that may result in more share-based arrangements, whose classification is liability.

In spite of that, it can provide specific exceptions from the liability classification for the arrangement, which comprise of features that are cash-settlement. We have got some variation when it comes to the recognition of the payroll taxes whereby, in IFRS there is strictly no specific guidance, but in most cases, are recognized as the compensation cost or at grant date-which actually depend on the obligation terms. But the US GAAP will need recognition when the events are obligated, or rather, when exercise of an award will occur.

The impairment of indefinite-life intangible assets is calculated differently in both IFRS and GAAP. For instant, in the case of IFRS, it is worked out by comparing the recoverable amount. There are generally two ways of calculating it. First, you can use the higher of fair value less the costs of selling. Secondly, higher value-in-use to carrying amount. On the same note, the US GAAP is worked out by comparing the fair value to the carrying amount.

There are differences in FAS established in the IFRA as compared to its equivalent in the GAAP. When the impairments are recorded, in the case of IFRS, impairment charges are accumulated in a contra-account to the asset, whereas, for the US GAAP, the impairment charges must be recorded directly against the asset, which will make a new cost basis for the asset. For the techniques for the valuation, the IFRS has a detailed guidance on inputs to valuation techniques.

It allows the carrying forward of measurement assumption to the subsequent measurement. It does not also let the mid-market pricing, unless when it is at offsetting positions. It assumes the bid price and will tend to ask the price of the liabilities. On the other hand, the US GAAP has a detailed guidance on three acceptable valuation approaches.

It never lets the carry-forward of measurement assumptions to the subsequent measurements. It will also treat the mid-market pricing as a practical expedient. For the fair value hierarchy, the IFRS will categorize the fair value measurements into two wide categories, whereas for the US GAAP, it will actually categorize the fair value measurements into three wide categories.


Banegil, M., and Sanguino, R. (2007). Intangible measurement guidelines: a comparative study in Europe. Journal of Intellectual Capital, 8 (2): 192-204.

Jerman, M., and Massimo, M. (2008). Accounting treatment of goodwill in IFRS and US GAAP. Organizacija, 41. Web.

Lev, B. (2001). Intangib­les, Management, Measurement andreporting. Washington, DC:.Brookings Institution Press.

Sevin, S., and Schroeder, R. (2005). Earnings management: evidence from SFAS No. 142 reporting. Management Auditing Journal, 20 (1): 47-54.

Sevin, S., Schroeder, R., & Bhamornsiri, S. (2007). Transparent financial disclosure and SFAS No. 142. Managerial Auditing Journal, 22 (7): 674-687.

Zang, Y. (2008). Discretionary behavior with respect to the adoption of SFAS no. 142 and the behavior of security prices. Review of accounting and Finance, 7 (1): 38-68.

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