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The concept of comparability is one of the underlying concepts brought forth under IFRS. Single year financial statements are not permitted (the only exception being for first year companies) yet they are allowed under GAAP.
Under IFRS, subsidiaries must adopt all the accounting policies of the parent company in consolidation. Before the adoption of the parent's accounting policies, it must be determined whether or not a specific entity is considered a related party required to consolidate. Such a determination of a consolidation under GAAP is based off of the Variable Interest Entity (VIE) model under FIN 46. Under FIN 46, consolidation decisions are based on determining who has the right to incur the income and losses of a related entity. Determinations are made naming the primary beneficiary of the related entity and assessing the relationship. IFRS focuses on the notion of control in determining whether a parent-subsidiary relationship exists. Control is defined as the ability to rule over the operating assets of an entity in order to obtain the benefits.
Compensation of key management is a required disclosure under IFRS, where as under GAAP it is not.
IFRS requires a detailed disclosure of the nature of each accrued expense and the nature of the changes to those accrued expenses. Under GAAP, accrued expenses are not required to be individually disclosed in the financial statements - increasing the transparency of financial statements.
The last-in-first-out (LIFO) costing methodology for inventory is prohibited under IFRS. The change to IFRS would force a company to adopt the first-in-first-out (FIFO) methodology or weighted average cost method. The adoption of a new costing method could significantly impact the operating results of an entity.
Impairment of Long-lived Assets
There are differences in the testing for the impairment of long-lived assets held for use. These differences could potentially lead to earlier impairment recognition under IFRS. GAAP uses the undiscounted cash-flow method in determining the recoverability of an asset, where as IFRS requires the use of an entity-specific discounted cash flow or fair value measurement. By having different testing requirements the determination of whether an asset is impaired or not could differ from one set of standards to the next (affecting the previously recognized loss).
Carrying Value of Assets
Under GAAP, assets are generally carried at historical cost (with a few exceptions for certain financial instruments), whereas under IFRS historical cost is the primary basis of accounting, however the ability to revalue assets (to fair market value) is allowed. By revaluing assets, there may be significant differences in the carrying value of these assets versus GAAP.
IFRS requires that separate, significant components of an item of property, plant and equipment be recorded and depreciated separately. If an asset has multiple aspects each with different lives, the asset must be depreciated in segments, rather than as a whole. IFRS annually evaluates the residual value of an asset at the balance sheet date.
Under GAAP, there is specific guidance in making the determination as to whether a lease is considered operating or capital. The four specific criteria surround:
Ownership transferring to the lessee,
a bargain purchase option,
lease term in relation to the economic useful life - 75%, and
the present value of minimum lease payments in relation to fair value of the leased asset - 90%.
IFRS focuses on the overall substance of the transaction and substantiality all of the risks or rewards of ownership are transferred to the lessee. IFRS measures all of the criteria GAAP uses, yet it does not place a specific threshold on the amount. This is a classic example of how GAAP follows a strict set of rules while IFRS necessitates judgment-based decisions.
There are several differences between IFRS and GAAP relating to accounting for and reporting of income taxes:
The tax rate used for measuring deferred taxes under GAAP is the enacted tax rate in place when the timing difference is expected to reverse, whereas under IFRS, the substantially enacted tax rate is used.
Under GAAP, the classification of the deferred tax asset or liability is either short-term or long-term depending on the underlying relationship of the timing difference. Under IFRS, deferred tax assets and liabilities are always recorded as long-term.
Under GAAP (for non-public companies), a reconciliation of the expected tax expense to actual is not required in detail and only a disclosure of the nature of the reconciling items is required. IFRS requires the complete reconciliation, including the nature and amounts.
Under GAAP, while the percentage of completion method is preferred, the completed contract method is acceptable in certain situations. GAAP does allow for the completed contract method in certain situations where a reliable estimate cannot be made and there is not an expected loss to be incurred on the project. IFRS specifically prohibits the use of the completed contract method, and instead recommends the use of the cost recovery method when percent complete can not be reliably estimated.
Combining and segmenting contracts is allowed, but not required under GAAP, however when certain criteria are met under IFRS, it is a requirement. The impact can substantially change a company's revenue contingent upon the circumstances within each contract (for example, the majority of costs incurred are on the segment of a project carrying lower margins than the rest of the project. In this case under IFRS, less income would be recognized if the job was broken out into segments).