Difference in Balance Sheet under IFRS and US GAAP

Difference in Balance Sheet under IFRS and US GAAP

How are IFRS and US GAAP different?

When preparing an IFRS balance sheet, assets are listed first, followed by equity, and then liabilities. This is different from a US GAAP balance sheet, which lists assets first, but then shows liabilities, with equity last.On an IFRS balance sheet, long‐term assets and long‐term liabilities are called noncurrent assets and noncurrent liabilities. Under US GAAP, these non‐current items are listed after current items. On an IFRS balance sheet, the presentation is usually reversed: non‐current assets are listed before current assets, and non‐current liabilities are listed before current liabilities.US GAAP requires that current assets be listed in liquidity order (i.e. from most liquid to least liquid), while on IFRS financial statements current assets are generally listed in reverse liquidity order

How would it change the financial statements?

To someone familiar with US GAAP balance sheets, an IFRS balance sheet may almost appear to be ‘upside down’. Assets are listed in nearly the opposite order from where they appear on a US GAAP balance sheet, and liabilities and equity are listed in reverse order. While the familiar accounts are all present, they will be in different locations from what financial statement users are used to seeing them.

What could it mean for businesses?

It will take some time before financial statement users are used to the revised ordering of the balance sheet. This may cause minor confusion until everyone has adjusted to the new layout. 

Equity: what are the differences between IFRS and US GAAP?

  • Balance Sheet Presentation of Preferred Stock
  • Equity Terminology
 

Balance Sheet Presentation of Preferred Stock

How are IFRS and US GAAP different?

On a US GAAP balance sheet, preferred stock is listed next to common stock, in the equity section. Dividends paid on preferred shares are treated in the same manner as dividends paid on common shares, meaning that they are deducted from retained earnings and not shown on the income statement.IFRS requires that preferred stock be listed as a liability. This means that dividends paid on preferred shares are considered to finance (interest) costs, and they are shown as such on the income statement and statement of cash flows. Preferred share dividends are not shown on an IFRS statement of retained earnings.

How would it change the financial statements?

The preferred stock will still be listed on balance sheets, but in a different location. The amount of paid dividends reported on the statement of retained earnings and the statement of cash flows would decrease for companies with preferred stock. The amount of finance (interest) costs reported would increase.On the income statement, these changes will result in a decrease to net income, however, on the balance sheet, there will be no change to retained earnings. On the statement of cash flows, the amounts of operating, investing, and financing activities will change, but the total cash flows will remain the same.

What could it mean for businesses?

Companies that issue preferred stocks are required to report such stock as a liability, and its dividends as interest expense. The higher liabilities and lower net income that result will have a negative impact on companies’ debt and times interest earned ratios. This may make it more difficult for companies to obtain financing, and stock market investors may view these changes negatively.

Liabilities: what are the differences between IFRS and US GAAP?

  • Contingent Liabilities

Contingent Liabilities

How are IFRS and US GAAP different?

Under US GAAP, probable contingent liabilities are recorded in journal entries, and therefore directly impact the financial statements. Reasonably possible contingent liabilities are only disclosed in the notes to the financial statements.Under IFRS, reasonably possible and probable contingent liabilities are treated in the same manner. All such liabilities are recorded in journal entries and impact the financial statements. Since more doubtful contingent liabilities are being recorded, under IFRS there are more adjustments to reverse previously recorded liabilities.

How would it change the financial statements?

More liabilities will be recognized and reported on the balance sheet. This will result in more losses being reported on the income statement. In some cases, these liabilities will simply be recorded sooner than they would under US GAAP. In other situations, liabilities may be recorded that do not come to pass. This would result in reverse recognition, which could result in gains being recorded on the income statement.

What could it mean for businesses?

As companies record these provisions and their associated losses, their liabilities will increase and their net income will decrease. This will hurt their financial ratios, most notably the debt ratio, which may make it more difficult for businesses to obtain debt financing. Investors may be unhappy with increased liability recognition, which could cause stock market prices to decrease.

Property, Plant & Equipment: what are the differences between IFRS and US

GAAP?

  • Asset Impairment and Revaluation

Asset Impairment and Revaluation

How are IFRS and US GAAP different?

Generally speaking, US GAAP requires most assets to be valued at their historical cost, as dictated by the Cost Principle. Under IFRS, companies can choose to value their assets at cost or fair market values. Some companies using IFRS adopt the fair market value approach. Companies who use the fair market approach must use it consistently. They are not allowed to switch back and forth between valuation methods.US GAAP allows long‐term assets that are permanently impaired to be written down in value. These write-downs cannot be reversed. Under IFRS, if the fair market valuation is used instead of historical cost, long‐term assets can be written up or down, depending upon their appraised fair market values. These write-ups and write-downs can be reversed, if it can be demonstrated that the asset’s value has changed again. None of these adjustments are considered to be permanent.The gains and losses on these writeups and writedowns are usually reported as reserves, and listed under equity, rather than appearing on the income statement. If there are no positive reserves present, write-downs will still result in losses on the income statement.

How would it change the financial statements?

If companies use fair market valuation for their long‐term assets, they will have to periodically reassess these market values, and this could result in adjustments to these assets’ valuations. These adjustments will result in reserves reported under equity, which would impact the balance sheet (or more rarely, losses reported on the income statement) which would impact net income.

What could it mean for businesses?

Companies will have much more leeway in presenting their assets values on their balance sheets. These amounts will be a better reflection of current value, and may, therefore, be more relevant for financial statement readers.However these fair values could easily fluctuate from year to year, and companies must be prepared to accept that losses may affect their net income when this occurs. These changes in value can often be tied to overall economic conditions, so companies may have lower equity and additional losses when the economy is poor, and higher equity when the economy is doing well.

Intangible Assets: what are the differences between IFRS and US GAAP?

  • Research & Development Costs
  • Intangible Asset Valuation

Research & Development Costs

How are IFRS and US GAAP different?

US GAAP requires that all research and development costs be immediately expensed, with the exception of computer software development costs, which are allowed to be capitalized if certain criteria are met. Under IFRS, all research costs are expensed immediately, but development costs are capitalized, under similar conditions to the ones US GAAP uses for computer software costs.

How would it change the financial statements?

Money spent on research will still be expensed on the income statement, however many development costs will now qualify for capitalization as intangible assets. These new development assets will appear on the balance sheet. These assets will be amortized as revenue from the related products is generated through sales. This amortization expense will appear on the income statement.

What could it mean for businesses?

New assets will appear on companies’ balance sheets. Companies that spend a great deal on research and development will have much better matching of expenses to revenues, as development costs will only be amortized/expensed when revenues are generated. This will provide more relevance for financial statement users.This change will likely have a strong impact on startup companies, which generally spend a few years refining and developing their products before offering them for sale to customers. During these initial years, these companies will accumulate assets on their balance sheets, rather than incur expenses on their income statements. This will result in lower losses during startup years, and lower profits in future years, once the products are being sold.

Intangible Asset Valuation

How are IFRS and US GAAP different?

US GAAP is reluctant to recognize intangible assets. Generally, such assets are only recognized when they are purchased. Internally developed intangible assets are usually not shown at all on a company’s balance sheet. IFRS is more open to recognition of intangible assets, whether internally developed or purchased. If these assets can be reliably measured/appraised, IFRS allows recognition at these appraised (fair market) values.As with tangible long‐term assets, IFRS allows for write-ups and writedowns in value. Additionally, recognized intangible assets can be amortized.

How would it change the financial statements?

Companies will have more intangible assets on their balance sheets, and the values on these assets will likely change over time with amortization or revaluation. These changes in value will result in amortization expense and potential losses appearing on the income statement, and reserves appearing under equity on the balance sheet.

What could it mean for businesses?

Businesses with significant internally‐developed intangible assets (e.g. patents, copyrights, trademarks, etc.) may be allowed to show these assets on their balance sheets, instead of as expenses on their income statements. This could initially result in higher net income and higher assets.However, recognizing these assets will require companies to revalue them regularly, and amortize if necessary. In the long run, this might result in additional reserves being reported under equity, which may increase equity.Amortization of these assets will result in amortization expenses on the income statement, however, these expenses would likely be more even and spread out over time. This could result in an income smoothing effect, which stock market investors find desirable.