• COVID-19
  • Insights
  • Who We Help
    •   Industrial Automation
    •   Manufacturing & Distribution
    •   A&E Professional Services
    •   International Businesses
      • ◦   Expanding Outside the U.S.
      • ◦   Expanding to the U.S.
  • Services
    •   COVID-19
      • ◦   Cash Flow Confidence Assessment
      • ◦   Maximize Your Loan Forgiveness
      • ◦   5 Key Focus Areas
      • ◦   COVID-19 Resource Center
    •   Client Accounting
      • ◦   Software Solutions
      • ◦   Accounting Support
      • ◦   Reporting
    •   Tax
      • ◦   R&D Tax Credit
      • ◦   Tax Credits & Incentives
      • ◦   Tax Structure
      • ◦   Federal Tax
      • ◦   State & Local Tax
      • ◦   Personal Tax
      • ◦   Other Tax Filings
    •   Advisory & Assurance
      • ◦   Assurance Levels
      • ◦   Reporting
      • ◦   Employee Benefit Plan Audits
      • ◦   Technical Accounting & Reporting
    •   Consulting
      • ◦   Data Analytics
      • ◦   Transaction Services
      • ◦   Business Planning
      • ◦   Succession & Exit Strategies
    •   International
      • ◦   International Tax
      • ◦   Foreign Direct Investment
      • ◦   Global Expansion
      • ◦   International Accounting
  • Events
  • Careers
    •   Why C&M
    •   Students
      • ◦   Campus Events
      • ◦   Internships
      • ◦   Reach Beyond Program
    •   Experienced Professionals
      • ◦   Team member profile videos
    •   Opportunities
    •   Employee Journals
    •   Office Tour
  • About Us
    •   How We Help
      • ◦   Service Approach
      • ◦   Affiliations
      • ◦   Communications & Technology
    •   Meet Our Team
    •   Testimonials
    •   Our Videos
    •   Our Story
  • Contact Us
  • Subscribe
CHANGE COUNTRY:
  • United States
  • 中国
  • Client Login
Clayton & McKervey Logo
  • COVID-19
  • Insights
  • Who We Help
  • Services
  • Events
  • Careers
  • About Us
  • Contact Us
  • Subscribe
    • Most Recent Insights
  1. Home
  2. Insights
  3. 5 Differences Between US GAAP and IFRS

5 Differences Between US GAAP and IFRS

Posted by Julie Killian on September 24, 2015

Julie Killian Julie Killian

Even for non-public US companies, having a basic understanding of International Financial Reporting Standards (“IFRS”) is beneficial. The continued global adoption of IFRS impacts US companies due to the convergence of generally accepted accounting principles in the US (“US GAAP”) and IFRS, as well as increased cross-border merger and acquisition activity, and the growing number of companies doing business globally. Included is a summary of 5 areas of existing differences between the frameworks and any corresponding guidance updates.

1. Revenue Recognition

Multiple deliverables

Under US GAAP, if certain criteria are met at the inception of an arrangement, multiple deliverables should be identified, separated and recognized as each item is considered delivered. IFRS addresses ‘multiple-element’ arrangements in general terms only, and generally, revenue recognition criteria are applied separately to each transaction.

Construction contracts

Under US GAAP, if certain criteria are met, construction contracts are accounted for using the percentage of completion method (“POC”). Otherwise, the completed contract method is used. IFRS also provides for POC, however, the completed contract method is not permitted unless the outcome of the contract cannot be estimated reliably, then the zero profit method of recognizing revenue to the extent of recoverable costs incurred shall be used, which is one of the approaches to the completed contract method under US GAAP.

On the horizon: Joint FASB/IASB Project

In May 2014, the extensive, converged standard, ‘Revenue from Contracts with Customers’ was issued. The new contract-based model provides for revenue to be recognized based on the satisfaction of performance obligations. Application would require entities to perform a 5-step process in identifying and recognizing revenue upon the satisfaction of performance obligations. The new standard for non-public entities issuing US GAAP financial statements will be effective for annual periods beginning after December 15, 2018, and for annual reporting periods beginning on or after January 1, 2017, under IFRS.

2. Leases

Capital leases

Under US GAAP, the existence of any one of four following conditions at inception calls for automatic classification of the lease as a capital (finance) lease (i.e., capitalized onto the balance sheet versus a period expense):

  • Ownership transfer of the property
  • Bargain purchase option
  • Lease term relative to the economic life of the asset (equal to or greater than 75%)
  • Present value of minimum lease payments relative to the fair value of the leased asset (equal to or greater than 90%)

IFRS requires classification of a finance lease after consideration of the existence of various additional factors (individually or collectively), but does not establish quantitative thresholds as US GAAP does.

On the horizon: Joint FASB/IASB Project

The objective of the project is to increase transparency and comparability among organizations and in general, a lessee would recognize assets and liabilities with a lease term of more than 12 months. The final update is estimated to be released in the fourth quarter of 2015.

3. Inventory

LIFO costing

Under US GAAP, last-in, first-out (“LIFO”) inventory costing is an acceptable costing methodology, which is not permitted under IFRS.

Lower of cost or net realizable value

The FASB recently issued ASU 2015-11 – Simplifying the Measurement of Inventory. Previously under US GAAP when the cost of inventory was no longer deemed to be recoverable, inventories were required to be written down to the lower of cost or market value (the replacement cost), which was subject to a ceiling and a floor. ASU 2015-11 requires that inventory be measured at the lower of cost or net realizable value (“NRV”). As a result, the consideration of replacement cost is no longer required. Under US GAAP any write-down from cost may not be reversed. IFRS also requires write-down to the NRV. IFRS permits reversal of a write-down if circumstances indicate that the NRV has increased in subsequent periods.

4. Taxes

Valuation allowance

Under US GAAP, a deferred tax asset (“DTA”) is recognized in full and is reduced by a valuation allowance if it is more likely than not that some portion of or all of the DTA will not be realized. IFRS requires recognition of a DTA to the extent that it is probable that taxable profits will be available against which the deductible temporary differences will be utilized, with no concept of a valuation allowance.

Uncertain tax positions

Under US GAAP, a threshold is established that a tax position must meet for any part of the benefit of that position to be recognized in the financial statements. A recognized tax position is initially and subsequently measured at the largest amount of the benefit that carries a greater than 50% likelihood of being realized. IFRS does not prescribe any specific guidance over uncertain tax positions.

5. Intangibles

Development costs

Under US GAAP, most research and development costs are charged to expense as incurred. Software development costs for external use are capitalized once technological feasibility is established. Software development costs for internal use incurred during the application development stage may be capitalized. IFRS establishes that certain development costs meeting specific criteria are capitalized as an internally generated intangible asset. No specific guidance on software development costs is addressed under IFRS.
Although US companies will not have to outright adopt IFRS any time soon, the converged set of standards is likely to continue to evolve. It is prudent for US companies to stay up-to-date on their understanding of the primary differences between IFRS and US GAAP as well as the impact of any convergence standards on their reporting objectives.

Our team is always ready to help.

Please contact us for more information.

Julie Killian

Julie Killian

Shareholder, Advisory & Assurance

Contact Julie   |   Read Julie's bio

related news

Doing Business in Mexico: What to Expect this Year

Without a doubt, this year will be interesting for Mexico. To start, it’s an election year and we all know what that means…a lot of uncertainty. As the global pandemic…

Read full story

What Expenses Qualify for R&D Tax Credits?

The R&D tax credit is one of the most overlooked opportunities to boost your bottom line. Many business owners fail to claim it under the mistaken belief that they’re not…

Read full story

Clayton & McKervey Launches The Sound of Automation Podcast

Media Contact: Denise Asker, dasker@claytonmckervey.com; 248.936.9488 Southfield, Mich.—February 17, 2021—Clayton & McKervey, a certified public accounting and business advisory firm helping growth-driven companies compete in the global marketplace, is excited…

Read full story

Misconceptions About the Research & Experimentation Tax Credit

As companies put more emphasis on Industry 4.0 and business processes become more automated and accessible, the opportunities for Research & Experimentation tax credits increase. The Research and Experimentation (R&E)…

Read full story

Your Guide to R&D Tax Credits

If you haven’t looked into the R&D tax credit before, there’s a good chance that you’re missing a big opportunity to boost your cash position. Even if they’re aware of…

Read full story

Categories

Jump directly to the topics that matter to you most.

  • A&E Professional Services
  • About Us
  • Advisory & Assurance
  • Business Owners
  • C&M Press Releases
  • Careers
  • China Consulting
  • Clayton & McKervey
  • Client Accounting Services
  • Consulting
  • COVID-19
  • Data Analytics
  • Estate Planning
  • Expanding Outside the U.S.
  • Expanding to the U.S.
  • From the President
  • Industrial Automation
  • International
  • Manufacturing & Distribution
  • Mexico Consulting
  • Podcasts
  • Private Client Services
  • Tax & Tax Credits
  • Transaction Services
  • Videos

Authors

Read news direct from our managers and stakeholders.

    • Ben Smith
    • Beth Butchart
    • Bryan Powrozek
    • Carlos Calderon
    • Casey Haggerty
    • Clayton & McKervey
    • Dave Van Damme
    • Denise Asker
    • Eric Lin
    • Jim Biehl
    • Julie Killian
    • Kevin Johns
    • Margaret Amsden
    • Miroslav Georgiev
    • Nina Wang
    • Rob Dutkiewicz
    • Ruben Ramirez
    • Sarah Russell
    • Sue Tuson
    • Tarah Ablett
    • Teresa Gordon
    • Tim Finerty
    • Tim Hilligoss
    • Wendy Reedy

Additional Resources

Additional news from Clayton & McKervey can be found below.

  • Subscribe to our email newsletter
  • View upcoming events
  • Contact us to let us know how we can help you
  • Main Content
  • Related Insights

5 Differences Between US GAAP and IFRS

Posted by Julie Killian on September 24, 2015

Julie Killian

Even for non-public US companies, having a basic understanding of International Financial Reporting Standards (“IFRS”) is beneficial. The continued global adoption of IFRS impacts US companies due to the convergence of generally accepted accounting principles in the US (“US GAAP”) and IFRS, as well as increased cross-border merger and acquisition activity, and the growing number of companies doing business globally. Included is a summary of 5 areas of existing differences between the frameworks and any corresponding guidance updates.

1. Revenue Recognition

Multiple deliverables

Under US GAAP, if certain criteria are met at the inception of an arrangement, multiple deliverables should be identified, separated and recognized as each item is considered delivered. IFRS addresses ‘multiple-element’ arrangements in general terms only, and generally, revenue recognition criteria are applied separately to each transaction.

Construction contracts

Under US GAAP, if certain criteria are met, construction contracts are accounted for using the percentage of completion method (“POC”). Otherwise, the completed contract method is used. IFRS also provides for POC, however, the completed contract method is not permitted unless the outcome of the contract cannot be estimated reliably, then the zero profit method of recognizing revenue to the extent of recoverable costs incurred shall be used, which is one of the approaches to the completed contract method under US GAAP.

On the horizon: Joint FASB/IASB Project

In May 2014, the extensive, converged standard, ‘Revenue from Contracts with Customers’ was issued. The new contract-based model provides for revenue to be recognized based on the satisfaction of performance obligations. Application would require entities to perform a 5-step process in identifying and recognizing revenue upon the satisfaction of performance obligations. The new standard for non-public entities issuing US GAAP financial statements will be effective for annual periods beginning after December 15, 2018, and for annual reporting periods beginning on or after January 1, 2017, under IFRS.

2. Leases

Capital leases

Under US GAAP, the existence of any one of four following conditions at inception calls for automatic classification of the lease as a capital (finance) lease (i.e., capitalized onto the balance sheet versus a period expense):

  • Ownership transfer of the property
  • Bargain purchase option
  • Lease term relative to the economic life of the asset (equal to or greater than 75%)
  • Present value of minimum lease payments relative to the fair value of the leased asset (equal to or greater than 90%)

IFRS requires classification of a finance lease after consideration of the existence of various additional factors (individually or collectively), but does not establish quantitative thresholds as US GAAP does.

On the horizon: Joint FASB/IASB Project

The objective of the project is to increase transparency and comparability among organizations and in general, a lessee would recognize assets and liabilities with a lease term of more than 12 months. The final update is estimated to be released in the fourth quarter of 2015.

3. Inventory

LIFO costing

Under US GAAP, last-in, first-out (“LIFO”) inventory costing is an acceptable costing methodology, which is not permitted under IFRS.

Lower of cost or net realizable value

The FASB recently issued ASU 2015-11 – Simplifying the Measurement of Inventory. Previously under US GAAP when the cost of inventory was no longer deemed to be recoverable, inventories were required to be written down to the lower of cost or market value (the replacement cost), which was subject to a ceiling and a floor. ASU 2015-11 requires that inventory be measured at the lower of cost or net realizable value (“NRV”). As a result, the consideration of replacement cost is no longer required. Under US GAAP any write-down from cost may not be reversed. IFRS also requires write-down to the NRV. IFRS permits reversal of a write-down if circumstances indicate that the NRV has increased in subsequent periods.

4. Taxes

Valuation allowance

Under US GAAP, a deferred tax asset (“DTA”) is recognized in full and is reduced by a valuation allowance if it is more likely than not that some portion of or all of the DTA will not be realized. IFRS requires recognition of a DTA to the extent that it is probable that taxable profits will be available against which the deductible temporary differences will be utilized, with no concept of a valuation allowance.

Uncertain tax positions

Under US GAAP, a threshold is established that a tax position must meet for any part of the benefit of that position to be recognized in the financial statements. A recognized tax position is initially and subsequently measured at the largest amount of the benefit that carries a greater than 50% likelihood of being realized. IFRS does not prescribe any specific guidance over uncertain tax positions.

5. Intangibles

Development costs

Under US GAAP, most research and development costs are charged to expense as incurred. Software development costs for external use are capitalized once technological feasibility is established. Software development costs for internal use incurred during the application development stage may be capitalized. IFRS establishes that certain development costs meeting specific criteria are capitalized as an internally generated intangible asset. No specific guidance on software development costs is addressed under IFRS.
Although US companies will not have to outright adopt IFRS any time soon, the converged set of standards is likely to continue to evolve. It is prudent for US companies to stay up-to-date on their understanding of the primary differences between IFRS and US GAAP as well as the impact of any convergence standards on their reporting objectives.

Our team is always ready to help.

Please contact us for more information.

Julie Killian

Shareholder, Advisory & Assurance

Contact Julie   |   Read Julie's bio

related news

Doing Business in Mexico: What to Expect this Year

Without a doubt, this year will be interesting for Mexico. To start, it’s an election year and we all know what that means…a lot of uncertainty. As the global pandemic…

Read full story

What Expenses Qualify for R&D Tax Credits?

The R&D tax credit is one of the most overlooked opportunities to boost your bottom line. Many business owners fail to claim it under the mistaken belief that they’re not…

Read full story

Clayton & McKervey Launches The Sound of Automation Podcast

Media Contact: Denise Asker, dasker@claytonmckervey.com; 248.936.9488 Southfield, Mich.—February 17, 2021—Clayton & McKervey, a certified public accounting and business advisory firm helping growth-driven companies compete in the global marketplace, is excited…

Read full story

Misconceptions About the Research & Experimentation Tax Credit

As companies put more emphasis on Industry 4.0 and business processes become more automated and accessible, the opportunities for Research & Experimentation tax credits increase. The Research and Experimentation (R&E)…

Read full story

Your Guide to R&D Tax Credits

If you haven’t looked into the R&D tax credit before, there’s a good chance that you’re missing a big opportunity to boost your cash position. Even if they’re aware of…

Read full story

Categories

Jump directly to the topics that matter to you most.

  • A&E Professional Services
  • About Us
  • Advisory & Assurance
  • Business Owners
  • C&M Press Releases
  • Careers
  • China Consulting
  • Clayton & McKervey
  • Client Accounting Services
  • Consulting
  • COVID-19
  • Data Analytics
  • Estate Planning
  • Expanding Outside the U.S.
  • Expanding to the U.S.
  • From the President
  • Industrial Automation
  • International
  • Manufacturing & Distribution
  • Mexico Consulting
  • Podcasts
  • Private Client Services
  • Tax & Tax Credits
  • Transaction Services
  • Videos

Authors

Read news direct from our managers and stakeholders.

  • Ben Smith
  • Beth Butchart
  • Bryan Powrozek
  • Carlos Calderon
  • Casey Haggerty
  • Clayton & McKervey
  • Dave Van Damme
  • Denise Asker
  • Eric Lin
  • Jim Biehl
  • Julie Killian
  • Kevin Johns
  • Margaret Amsden
  • Miroslav Georgiev
  • Nina Wang
  • Rob Dutkiewicz
  • Ruben Ramirez
  • Sarah Russell
  • Sue Tuson
  • Tarah Ablett
  • Teresa Gordon
  • Tim Finerty
  • Tim Hilligoss
  • Wendy Reedy

Additional Resources

Additional news from Clayton & McKervey can be found below.

  • Subscribe to our email newsletter
  • View upcoming events
  • Contact us to let us know how we can help you

Website

  • COVID-19
  • Insights
  • Who We Help
  • Services
  • Events
  • Careers
  • About Us
  • Contact Us
  • Subscribe

Location

+1 248.208.8860
2000 Town Center
Suite 1800
Southfield, MI
48075 | USA

Connect

  • Events
  • Newsletter
  • Client Login

Social

  • LinkedIn
  • Facebook
  • Twitter
  • Glassdoor
  • YouTube
  • Instagram

Awards

DFP Top Work Places Best & Brightest
Prime Global

Tax | Accounting | Assurance | Consulting | Highly technical and accessible team of CPAs helping growth driven, closely held, middle market companies compete in the global marketplace. Michigan-based accountants and advisors focused on helping business owners in the United States and throughout Europe and China.

Privacy Policy Disclaimer

© 2021 Clayton & McKervey