CFA –Level I

Key Differences Between

US GAAP vs. IFRS

- Presented by Utkarsh Jain
 Part- I Part-II
Statement of Comprehensive Income and Capitalization of Interest- Income earned
Statement of Shareholders Equity

Elements Related to Performance Research and Development Cost Treatment
Standard Setting Approaches Component Depreciation
Revenue Recognition Criteria Revaluation Model (IMP)
Long Term Contracts Investment PPE
Barter Transactions Impairment of PPE (VIMP)
Extraordinary Items Loss Recovery

Balance Sheet Format Presentations (IMP) Valuation Allowance

Interest/Dividend Paid/ Received in CFS (IMP) Netting of DTA/DTL- Current/Non Current

Indirect vs. Direct Method for CFO Effective Interest rate method for Bond
Liabilities
Inventory Cost Flow Methods Treatment of Issuance Cost (IMP)
Concept of LIFO Reserves Fair Value Reporting Option for Debt
Inventory Valuation Methods (IMP) Finance Lease recognition
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Exception to Retrospective Application Defined Benefit Plans cost Components
Concept (IMP)
Overview
1. Issuing Body
2. Principle Setting
Approach
3. For the Exams!

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Statement of Comprehensive Income

IFRS US GAAP

IS can be Combined Similar Presentation

with OCI and presented except that firms can
a Single Statement of CI choose to report CI in
i.e. IS + OCI = CI Statement of
OR Shareholders Equity
IS and CI can be
presented separately
Unilever Group- Income Statement
IFRS
IFRS
Elements Related to Performance
IFRS US GAAP

•  Income •  Revenues
•  Expenses •  Expenses
•  Gains
• Losses
• Comprehensive Income

(Memory trick : US GAAP is generally more
detailed)
Definition of Asset
IFRS US GAAP

•  Resource from which •  Assets are probable

Future Economic Benefit is future economic benefits
Expected to Flow obtained or controlled by a
particular entity

•  use of word “probable”

in definition of assets and
liabilities
Revenue Recognition Criteria for Sale of Goods

IFRS US GAAP
1.  Risk and Reward is 1.  Revenue is realized/
transferred realizable
2.  No control over the goods 2.  Earned
3.  Revenue reliably
measured
4.  Probable flow of economic
benefits
5.  Cost can be reliably
measured
 Long Term Contracts
IFRS US GAAP
•  When outcome can be reliably •  When outcome can be reliably
measured - Percentage of measured - Percentage of
Completion Completion
•  When outcome can’t be •  When outcome can’t be
reliably measured-revenue is reliably measured-
recognized to the extent of Completed Contract Method,
cost, cost are expensed when Revenue, expenses and profit
incurred, profit recognized on is recognized when the
completion contract is complete

•  If loss is expected- recognize loss •  If loss is expected- recognize loss

immediately immediately
 Long Term Contracts- US GAAP/IFRS
•  Assume that XYZ Construction Corp has a contract to build a office building for
$5000 and a reliable estimate of the contract’s total cost is $4000. Project cost
incurred by XYZ is as follows:
Year 2014 2015 2016 Total
Cost Incurred $ 2000 $ 800 $ 1200 $ 4000
•  If outcome can be reliably measured, determine profit and revenue under US GAAP
and IFRS

Year 2014 2015 2016 Total

% Completion

Revenue

Cost

Profit
Long Term Contracts- US GAAP/IFRS
Year 2014 2015 2016 Total
Cost Incurred $ 2000 $ 800 $ 1200 $ 4000

•  If outcome can’t be reliably measured, determine profit and revenue under US GAAP and
IFRS

IFRS 2014 2015 2016 Total

Revenue
Cost
Profit

US GAAP 2014 2015 2016 Total

Revenue
Cost
Profit
Barter Transactions

IFRS US GAAP
•  Revenue must be based •  Revenue can be
on fair value of revenue recognized at fair value
from similar non barter only if firm has historically
transaction with non received cash payments
related parties for such goods/services.

(Memory Trick: Round Trip Transactions)
Extraordinary Items

IFRS US GAAP
•  Unusual or Infrequent Item- •  Unusual or Infrequent Item-
Included in Income from continuing Included in Income from continuing
operations operations

•  Does not allow •  Unusual and Infrequent
extraordinary items to be items- Reported
reported separately separately in the income
statement , net of tax,
after income from
continuing operations


JP Morgan and Chase
Balance Sheet Presentation

IFRS US GAAP
•  Requires current and non •  Requires current and non
current assets and liabilities current assets and liabilities
separately separately
•  Known as classified Balance •  Known as classified Balance
Sheet Sheet
•  Exception: Liquidity Based
presentation is also allowed
(mostly used by banks)
•  IFRS does not specify the order in Companies using U.S. GAAP (e.g.,
which current or non current Colgate) order items on the balance
assets/ liability should be sheet from most liquid to least
presented liquid
•  Generally, Companies using IFRS
order balance sheet information
from least liquid to most liquid.
 Example of Classified
Balance Sheet
IFRS

Less Liquid

More Liquid
US GAAP Example of Classified
Balance Sheet

More Liquid

Less Liquid
 Example of Liquidity Based Presentation
China Construction Bank

Exception in IFRS
Cash Flow Statement Items- Non Financial Firm

Item IFRS US GAAP

Memory Trick: CFO/Logical Memory Trick US loves
CFO

Dividend Paid CFO/CFF CFF

Interest Paid CFO/CFF CFO
Dividend Received CFO/CFI CFO
Interest Received CFO/CFI CFO

Item
IFRS US GAAP
Memory Trick: Logical Memory Trick US loves
CFO

Taxes Related to Operating activities CFO CFO

Taxes related to Financing Activities CFF CFO
Taxes Related to Investing activities CFI CFO
Cash Flow Statement Presentation

IFRS US GAAP
•  Encourage the use of Direct •  Encourage the use of direct
Format format

•  If direct method is used, Firm

•  No such disclosure required must add a disclosure of
indirect method
•  Most companies use indirect
method
•  (Memory trick: Accountants don’t like
extra work)
Inventory Valuation Methods

IFRS US GAAP
•  Specific Identification •  Specific Identification
•  Weighted Average •  Weighted Average
•  FIFO •  FIFO
•  LIFO
•  Concept of LIFO Reserve
Inventory Valuation Methods

Items- Year 1 LIFO FIFO LIFO Reserve

Inventory Purchases 1000 1000
Cost of Goods Sold 500 300
Closing Inventory 500 700

Items- Year 2 LIFO FIFO LIFO Reserve

Opening Inventory 500 700
Cost of Goods Sold 200 100
Closing Inventory 300 600

Items- Year 3 LIFO FIFO LIFO Reserve

Opening Inventory 300 600
Cost of Goods Sold 250 100
Closing Inventory 50 500
Inventory Write Downs
In certain industries
like agricultural, forest
produce and mineral
ores, both IFRS and US
GAAP require Inventory Write Downs
inventory to be
reported at NRV

IFRS US GAAP
Lower of Lower of

COST NRV COST Market

Selling Price (-) Selling Cost Replacement Cost

Subsequent recovery is allowed to

the extent of previous write down Subsequent
NRV- recovery is
Normal not allowed NRV
Profit
Inventory Write Down

•  FT Inc sells Mobile Phones. Per- unit cost information pertaining to

inventory is as follows. Calculate Carrying Value of Inventory under US
GAAP and IFRS

Original Cost 500

Estimated Selling Price 450
Estimated Selling Cost 10
Replacement Cost 420
Normal Profit Margin 40


CFA –Level I
Key Differences Between
US GAAP vs. IFRS- Part II

- Presented by Utkarsh Jain
Capitalized Interest

IFRS US GAAP
•  Interest that accrues during the •  Interest that accrues during the
construction period is construction period is
capitalized as a part of the capitalized as a part of the
assets cost assets cost

•  Income earned by •  No such reduction

temporary investing
borrowed funds reduces
the interest that is eligible
for capitalization
Research and Development cost

IFRS US GAAP
•  Research cost - Expensed •  Research Cost- Expensed

•  Development Cost - Capitalized •  Development Cost – Expensed

(* Software Development Cost )
Software Development Cost

Software Development
Cost

IFRS US GAAP

Developed Developed Developed Developed

for Use for Sale for Use for Sale

Up to Feasibility – Up to Feasibility –
Up to Feasibility – Expense
Capitalize Expensed
Thereafter- Capitalize
Thereafter- Capitalize Thereafter- Capitalize
Software Development Cost

•  FT Inc, incurred a cost of $3000 a month, for a period of ten months to

develop a software. However, the technological feasibility was
established only after the third month. What amount cost should be
capitalized under US GAAP and IFRS assuming the software was
developed for internal use or it was developed for sale .
IFRS US GAAP
Developed Developed Developed Developed
for Use for Sale for Use for Sale
Component Depreciation

IFRS US GAAP
•  IFRS Requires firms to •  Component Depreciation is
depreciate component of Assets allowed, but seldom used.
separately
•  Requiring useful life estimates
for each component

Component Depreciation

IFRS US GAAP
•  IFRS Requires firms to •  Component Depreciation is
depreciate component of Assets allowed, but seldom used.
separately
•  Requiring useful life estimates
for each component

Component Depreciation

•  FT Inc, purchased a Machinery at a cost of $10 Million. The estimated life

of the Machine is 8 years and estimated salvage value is $2 Million. FT
Inc expects to replace a major part of the machine after 4 years. Cost of
the major component part is $4 Million. Calculate Depreciation under US
GAAP and IFRS using Straight Line Method.
Cost vs. Revaluation Model

IFRS US GAAP
•  Firms can either use Cost or •  Assets are reported at
Revaluation Model Cost (– )Accumulated Depreciation
•  However, same model should
be asset for entire asset class
•  Revaluation model is rarely
used in practice
 Revaluation Model

Fair Value- 150

Loss Reversal in
Original Value - Fair Value- 80 IS-20
100 Loss in IS- 20 Excess gain of 50-
BS revaluation
surplus

Fair Value- 60
Fair Value- 130 Gain Reversal in
Original Value - Gain of 30- BS BS-30
100 Revaluation Surplus Excess loss of
40- IS

Gain- Revaluation Surplus
Loss- Income Statement
 Impairment of PPE

Impairment

Assess- Annually Only if circumstances Indicate

IFRS US GAAP

Two Step Process

Carrying Recoverable
vs.
Value Amount 1.  Recoverability Test:
Compare Carrying Value
Higher of Vs
Total of Undiscounted CF

1.  NRVà Selling Price- Selling Cost 2.  Loss Measurement
2.  Value in useà PV of FCF Loss = CV (-) PV of Future CF

Loss Reversal is allowed Loss Reversal is not allowed
Asset Impairment

•  Information related to equipment of FT Inc. Calculate Impairment loss

under both US GAAP and IFRS
Item Amount
Original Cost $500,000
Accumulated Depreciation till date $100,000
Expected Future Cash Flow $425,000
Fair Value $400,000
Value in Use $385,000
Selling Cost $40,000
Investment PPE

IFRS US GAAP
•  Property owned for the •  Does not distinguish
purpose of collecting between regular PPE and
rental income or capital Investment PPE
appreciation is classified
as Investment PPE.
•  Gives a choice of Cost or Fair Value
for Investment PPE.
•  Use same valuation model for all
PPE
Deferred Tax Assets/ Deferred Tax Liabilities

IFRS US GAAP
•  Netted •  Generally not netted

•  Classified as non current •  Classifies as current as

well as non current
•  Does not use the term •  “Valuation Allowance”
“valuation allowance”
Long Term Bond Liability- Calculation

IFRS US GAAP
•  Effective Interest rate •  Effective interest rate is
method for amortizing preferred but straight line
discount/ premium is method is also allowed.
required
Bond Issuance Cost

IFRS US GAAP
•  Initial bond liability is •  Issuance cost are
reduce by the amount of capitalized as an asset
amortization expense

•  CFF •  CFF
Classification of Lease- Books of Lessee

IFRS US GAAP
•  “ Economic Substance “ •  Specific Rules
•  Classify as Finance lease,
if any one of the following
condition is satisfied
1.  Tile Transfer
2.  Bargain Purchase
3.  Lease Tenure > 75% of Life
4.  PV of Lease Pmts > 90%
Value of Asset
Classification of Lease- Books of Lessor

IFRS US GAAP
•  It does not distinguish •  Capital Lease is Classifies
between the two, as either “sale type lease”
however treatment is or “direct financing lease”
similar
Component of Pension Expense

IFRS- IS US GAAP- IS
•  Current Service Cost •  Current Service Cost
•  Past Service Cost • 
•  Interest Income/ Gain •  Interest Expense/
Expected Return

IFRS- BS - OCI US GAAP-BS- OCI

•  Actuarial Gains/Losses •  Actuarial Gains/Losses
•  Actual Return- Expected •  Past Service Cost
Return
Thank You!