As globalization spreads, there is a growing need for a universal accounting standard. This is where International Financial Reporting Standards (“IFRS”) steps in; founded by the International Accounting Standards Board (“IASB”), IFRS has been adopted in more than 100 countries, but the United States has yet to adopt. From the Norwalk Agreement to IFRS 3, IFRS and US Generally Accepted Accounting Principles (“GAAP”) have come closer to convergence, but even with these fundamental steps, they still have a fair amount of differences.
Revenue recognition is definitely a front runner, and one of several top targets the US Financial Accounting Standards Board (FASB) and IASB are working on to converge. US GAAP provides a lot of guidance, but no set standard. IFRS requires revenue recognition when the risks and rewards of ownership have transferred and performance has occurred. Right now we are all waiting for the results of the joint project between the IASB and FASB.
Inventory Accounting Methods
Under IFRS, there is no LIFO costing for inventory, lower of cost or net realizable value presentation is required and lower of cost or market adjustments must be reversed under defined conditions.
For property, plant, and equipment under IFRS, impairment is suggested when book value exceeds the greater
of the value in use or the fair value less the cost to sell. Under US GAAP a triggering event has to occur prior to requiring an assessment of the difference between fair value and carrying value. IFRS also calls for revaluation and reversal of revaluation in certain situations. US GAAP never allows for reversal of impairment.
Impairments for Intangible Assets
Except for goodwill, IFRS also allows for the reversal of impairments recognized for intangible assets, and goodwill impairment is assessed similar to the assessment of impairment of intangible assets under US GAAP; in a single step.
Under IFRS current liabilities, contingencies and subsequent events are measured by their best estimate to settle, discounted to present value. One of the most striking differences is that IFRS provides for some recognition of contingent gains, if they are probable of realization.
Under IFRS deferred income taxes are automatically non-current assets or liabilities. There is no “more likely than not” threshold applied for uncertain tax positions, and tax rate changes are recognized when they are” substantially enacted” which is prior to US GAAP recognition. Under US GAAP the classification of deferred tax assets and liabilities follows the source of the asset or liability that resulted in the deferral.
Of course, we have all seen the move to converge to the elimination of operating leases and recognition of the liability and a right to lease. This remains another hot topic of the joint project between the IASB and FASB. The IASB and FASB plan to release a joint exposure draft for public comment in the fourth quarter of 2012.