A U.S. Manager's Guide to Differences Between IFRS and U.S. GAAP

WITH THE GREATER LIKELIHOOD THAT YOU WILL FACE SITUATIONS THAT REQUIRE AN UNDERSTANDING OF THE DIFFERENCES BETWEEN U.S. GAAP AND IFRS, THE ODDS INCREASE THAT YOU WILL ALSO HAVE TO BE ABLE TO ESTIMATE THE IMPACT OF THESE DIFFERENCES. EXECUTIVE SUMMARY International Financial Reporting Standards (IFRS) are now required for consolidated financial reports for all European Union exchange-listed companies. Officials estimated that for 2005, the initial year of EU adoption, 8,000 financial statements were prepared in accordance with IFRS for the first time. Other countries have also adopted IFRS or IFRS-equivalent financial reporting standards. IFRS differ from U.S. Generally Accepted Accounting Principles (GAAP) in many key areas. The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are working on various convergence projects designed to reduce or eliminate differences between the two sets of reporting standards. But existing differences will likely continue for at least the next two years, and, for many accounting topics, differences are likely to last much longer. This article highlights the 20 convergence projects and summarizes the differences between the two sets of standards. In addition, differences in three topics that are not included in the convergence efforts are identified. Differences between IFRS and U.S. GAAP found in actual EU company Form 20-F filings are used to illustrate the impact of the reporting-standard differences. Accountants know that financial reporting standards differ by country or region. In the United States, financial accountants, auditors, and analysts are very familiar with U.S. GAAP. Accountants and auditors in other countries may be well-versed in their homecountry GAAP, or they may be familiar with the requirements of International Financial Reporting Standards (IFRS) developed by the International Accounting Standards Board (IASB). The European Commission's adoption of IFRS for EU public company consolidated reports in 2005 required many preparers, auditors, and analysts to become familiar with the content and application of IFRS. Standards similar to IFRS were required in Australia for the first time in 2005 as well. It has been estimated that, during that year, 8,000 additional financial statements were based on IFRS. This number will continue to grow as more countries adopt IFRS or IFRS-equivalent financial reporting standards. Canada, for example, is expected to adopt IFRS effective January 1, 2011.1 In today's global business environment, it is likely that U.S. businesses have customers, suppliers, or potential acquisition candidates that prepare their financial statements in accordance with IFRS. To evaluate the financial condition and net income of these companies appropriately, accountants familiar with U.S. GAAP need to understand where U.S. GAAP and IFRS differ and be able to estimate the potential impact of these differences. We will look at current differences between U.S. GAAP and IFRS using three steps: 1. The FASB and IASB identified short- and long-term convergence projects in their 2006 "Roadmap for Convergence."2 The accounting topics mentioned in these convergence projects are listed in two tables, and key differences between IFRS and U.S. GAAP are provided. 2. A few additional accounting topics not addressed by either convergence project are noted, and key differences are highlighted. 3. The actual impact of the key differences on net income is illustrated using Form 20-F reconciliations of IFRS-based net income compared to that computed using U.S. GAAP. In 2006, the IASB announced that no major changes in IFRS will occur before 2009.3 The implementation dates for new standards adopted during the next two years will be delayed until then. This means that even if differences between the two sets of accounting standards are resolved through the FASB and IASB convergence projects, important differences in the existing financial reporting standards will continue for at least the next few years. …