In a comparison of IFRS and U.S. GAAP published in September 2005, Deloitte Touche Tohmatsu identified more than 100 differences in the two sets of standards. Exhibit 11.9 summarizes some of these differences. Note that a number of these differences are within the scope of the FASB-IASB convergent s projects and therefore are likely to be eliminated over time.
The types of differences that exist between IFRS and U.S. GAAP can be generally classified as follows:
1. Recognition differences.
2. Measurement differences.
3. Presentation and disclosure differences.
Examples of each type of difference are described next:
Several differences between IFRS and U.S. GAAP relate to- (1) whether an item is recognized or not, (2) how it is recognized, or (3) when it is recognized. A good example of this type of difference relates to the accounting for research and development (R&D) costs. Under U.S. GAAP, R&D costs must be expensed immediately. The only exception relates to costs incurred in developing computer software, which must be capitalized when several restrictive criteria are met. IAS 38, “Intangible Assets,” also requires immediate expensing of all research costs.
Development costs, on the other hand, must be recognized as an internally generated intangible asset when certain criteria are met. Deferred development costs are amortized over their useful life but not to exceed 20 years. Development costs include all costs directly attributable to or that can be reasonably allocated to development activities including personnel costs, materials and services costs, depreciation on fixed assets, amortization of patents and licenses, and over- head costs other than general administration.
The types of development costs that might qualify as an internally generated intangible asset under IAS 38 include computer software costs, patents and copyrights, customer or supplier relationships, market share, fishing licenses, and franchises. Brands, advertising costs, training costs, and customer lists are specifically excluded from recognition as an intangible asset.
Other recognition differences relate to-(1) gains on sale and leaseback transactions, (2) past service costs related to vested pension benefits, and (3) deferred tax assets.
Measurement differences result in the recognition of different amounts in the financial statements under IFRS and U.S. GAAP. In some cases, these differences result from different measurement methods required under the two sets of standards. For example, although both IFRS and U.S. GAAP require the use of a lower-of-cost-or-market rule in valuing inventory, the two sets of standards measure “market” differently.
Under U.S. GAAP, market value is measured as replacement cost (with net realizable value as a ceiling and net realizable value minus a normal profit as a floor). IAS 2, “Inventory,” requires inventory to be carried on the balance sheet at the lower of cost or net realizable value.
In other cases, measurement differences can exist because of alternatives allowed by one set of standards but not the other. Permitting the use of LIFO under U.S. GAAP but not allowing its use under IFRS is an example of this type of difference.
One of the greatest potential differences between the application of IFRS and U.S. GAAP is found in IAS 16, “Property, Plant, and Equipment.” In measuring fixed assets subsequent to acquisition, IAS 16 establishes cost less accumulated depreciation and impairment losses as the benchmark treatment. This is consistent with US. GAAP. The allowed alternative provided in IAS 16 allows fixed assets to be measured and reported on the balance sheet subsequent to acquisition at a revalued amount, which is measured as fair value at the date of revaluation less any subsequent accumulated depreciation and impairment losses.
If a company elects to follow the allowed alternative, it must make revaluations regularly enough that the carrying value reported on the balance sheet does not differ materially from fair value. Companies following the allowed alternative need not adopt this treatment for all classes of property, plant, and equipment. However, they must apply it to all items within a class of assets. A company could choose to revalue land but not buildings, for example, but it would need to revalue each and every parcel of land it owns at the same time.
Presentation and disclosure differences relate to the manner in which items are presented on the financial statements or disclosed in the notes to the financial statements. Presentation of certain gains and losses as extraordinary items under U.S. GAAP, which is not allowed under IFRS, is one example. Another is the difference between the two sets of standards in what is considered a discontinued operation and therefore presented separately in the income statement. The U.S. GAAP definition of a discontinued operation is less restrictive.
Perhaps the greatest difference between IFRS and U.S. GAAP with respect to presentation is the fact that IFRS contain a single standard—IAS 1, “Presentation of Financial Statements”— that governs the presentation of financial statements. U.S. GAAP has no equivalent to IAS 1.