International Financial Reporting Standards (IFRS) exist as an alternative to U.S. generally accepted accounting principles (GAAP) as issued by the Financial Accounting Standards Board (FASB). Designed to replace the “rules based” GAAP with a more principles based approach, FASB has been working with the international standard setters to conform and converge GAAP to IFRS.
The SEC has recently signaled their support for a switch to IFRS by 2015, so long as progress continues to be made in a number of areas. For private companies, there is actually an IFRS–lite version (called IFRS-SME for Small and Medium sized Entities) that came out in 2009 and is a mere 230 pages, as contrasted to the 10,000+ pages of today’s GAAP.
CPA’s are now able to issue reports on either IFRS or GAAP.
During 2010, the FASB has signaled that proposals will be forthcoming to continue the convergence in the following key areas:
- All leases, including operating leases, will likely be capitalized onto the balance sheet
- Financial reports will need to be comparative, not just show a single year
- The cash flow statement will need to be presented on a “direct” method to provide more information about operational cash inflows from customers, and cash outflows to vendors and employees
So, what are the differences between GAAP and IFRS-lite? Here is our short list:
- Prepaid insurance and other expenses: Will be shown within trade and other accounts receivable under IFRS.
- LIFO inventory method: Will not be permitted under IFRS as a way to save on taxes.
- Deferred loan and other financing fees: Will no longer be spread over the life of the loan under GAAP’s matching concept, but rather would be expensed in the year paid under IFRS.
- Intangible assets, such as customer lists acquired in a business combination: Will no longer be stated separately from goodwill, but rather would be included as one category, subject to both amortization over a maximum of 10 years AND subject to an annual impairment test. This may be attractive to some companies, as it avoids the expense of having an outside financial valuation consultant perform a study to allocate business combination consideration into buckets.
- Costs of a business combination: The former GAAP rule to include these costs as a part of the combination has been retained by IFRS. Under current GAAP since 2009, these are period expenses.
- Internally developed software: Would always be a current period expense under IFRS.
- Fixed assets: Large assets would be separated into individual components, something that is only rarely done under GAAP.
Other, less common areas where there could be differences include revenue recognition in certain areas (including the completed contract method), some elements of balance sheet presentation, accounting for restructuring costs, lease escalation clauses, and pending litigation matters. Under IFRS, there is greater flexibility in valuing stock options and doing asset impairment evaluations. There is little or no industry specific guidance.