Topic 5 Flashcards
(15 cards)
What are the key differences in overall approach between IFRS and US GAAP?
IFRS is principles-based with limited implementation guidance (around 3,000 pages), while US GAAP is rules-based with detailed guidance, bright-line tests, and industry-specific requirements (over 25,000 pages).
IFRS permits more measurement options, particularly fair value, whereas US GAAP has more industry-specific rules and quantitative thresholds.
What explains the pattern of differences between IFRS and US GAAP?
Three main patterns explain the differences:
1) Rules vs. principles approach (US more detailed guidance),
2) Conservative approach to estimates in US GAAP (no development cost capitalization, no impairment reversals),
3) Limited fair value application in US GAAP compared to IFRS.
How do inventory valuation requirements differ between IFRS and major national GAAPs?
IFRS (IAS 2) permits FIFO or weighted average and prohibits LIFO, while US GAAP allows LIFO (for tax reasons), FIFO, and weighted average.
German, Italian, and Japanese traditional GAAPs permitted LIFO.
How do approaches to development costs differ between IFRS and major national GAAPs?
IFRS (IAS 38) requires capitalization when specific criteria for technical and commercial feasibility are met, whereas US GAAP generally requires expensing all R&D costs (with limited exceptions for software).
How do impairment approaches differ between IFRS and major national GAAPs?
IFRS (IAS 36) uses a one-step approach comparing carrying amount directly to recoverable amount with required reversals when conditions improve, while US GAAP employs a two-step approach first testing with undiscounted cash flows, then measuring based on fair value, with no reversals permitted.
How do fair value measurement options differ between IFRS and major national GAAPs?
IFRS provides more fair value options, such as the revaluation model for PPE (IAS 16), intangibles with active markets (IAS 38), and investment property fair value option (IAS 40).
In contrast, US GAAP, Japanese GAAP, and Chinese GAAP generally require historical cost for these asset categories. This represents IFRS’s greater emphasis on relevance over reliability.
What pattern emerges in differences between IFRS and Continental European GAAPs?
Key patterns include:
1) Investor focus in IFRS vs. creditor/tax focus in Continental systems,
2) Economic substance in IFRS vs. legal form emphasis,
3) More comprehensive recognition in IFRS,
4) Fair value options in IFRS vs. historical cost dominance,
5) Balance between relevance and reliability differs.
These reflect different purposes of financial reporting.
How do pension accounting requirements differ across systems?
IFRS (IAS 19) requires defined benefit obligations to be discounted and remeasurement gains/losses to OCI.
US GAAP has similar requirements. Traditional Italian GAAP did not require discounting, while German and French GAAPs recognized remeasurement effects through income.
This shows IFRS’s greater emphasis on economic substance over prudence.
How do goodwill accounting approaches differ between IFRS and major national GAAPs?
IFRS (IFRS 3) requires impairment testing without amortization.
Traditional German, French, and Japanese GAAPs required amortization over periods of 5-20 years. UK GAAP before IFRS required maximum 20-year amortization.
This represents a significant shift in IFRS toward the US approach (impairment-only) away from European amortization traditions.
How do revenue recognition approaches differ between IFRS and national GAAPs?
IFRS (IFRS 15) and current US GAAP use a converged five-step model focusing on performance obligations and transfer of control.
Traditional German, French, and UK GAAPs had less detailed guidance, often based on risks/rewards transfer or completion of earnings process.
Continental systems often favored completed contract methods for prudence reasons.
How do lease accounting approaches differ between IFRS and national GAAPs?
IFRS (IFRS 16) requires capitalization of all leases (with minor exceptions), while traditional German tax law, UK GAAP, and IFRS for SMEs required capitalization only for finance leases.
French and Italian unconsolidated statements historically banned lease capitalization.
This reflects IFRS’s substance over form emphasis.
What are the key differences between IFRS and Japanese GAAP?
Japanese GAAP is characterized by: 1) More conservative approach to revenue recognition, 2) Traditionally required goodwill amortization, 3) Limited fair value application, 4) More restrictive consolidation criteria based on control percentages, 5) No reversal of impairment losses permitted.
These reflect Japan’s traditional emphasis on prudence.
How has IFRS influenced the development of national GAAPs globally?
IFRS has influenced national GAAPs through: 1) Direct replacement for listed company reporting, 2) Convergence projects aligning national standards, 3) IFRS for SMEs adoption or adaptation for non-listed entities, 4) National standard setters using IFRS as reference for new standards.
Even countries not adopting IFRS have moved closer to IFRS principles.
What factors explain why countries maintain differences from IFRS in their national GAAPs?
Key factors include:
1) Tax system requirements,
2) Legal system constraints,
3) Traditional emphasis on creditor protection,
4) Preference for historical cost reliability over fair value relevance,
5) Different user needs for non-listed entities,
6) Costs of transition and implementation for smaller entities.
What is IFRS for SMEs and how does it compare to full IFRS and national GAAPs?
IFRS for SMEs is a simplified version for non-publicly accountable entities, with fewer options, less fair value, simplified measurements, and reduced disclosures.
It represents a compromise between full IFRS and traditional national GAAPs.
Many countries have adopted or adapted it (e.g., UK FRS 102 is based on IFRS for SMEs).
