Topic 5: IFRS Compared to National GAAPs Flashcards
(30 cards)
What is the nature and scope of IFRS?
IFRS is a set of principles-based global accounting standards developed by the IASB. Current scope includes IAS 1-41 (older standards) and IFRS 1-17 (newer standards) covering presentation, recognition, measurement, and disclosure across all major accounting areas. IFRS is primarily designed for public company consolidated reporting but adaptations exist for SMEs.
What are the key objectives and qualitative characteristics of IFRS?
IFRS aims to provide high-quality, transparent information useful for economic decision-making by investors, lenders and creditors. Key qualitative characteristics include: 1) Fundamental: relevance and faithful representation, and 2) Enhancing: comparability, verifiability, timeliness, and understandability. IFRS prioritizes economic substance over legal form.
What are ‘overt options’ in IFRS?
‘Overt (open) options’ are explicit choices permitted in standards. IFRS contains more options than most national GAAPs, including: inventory valuation (FIFO/weighted average), PPE measurement (cost/fair value), government grant presentation, investment property measurement, and cash flow classification options. These options accommodate different traditions.
What are ‘covert options’ in IFRS?
‘Covert (hidden) options’ arise from judgment areas that create implicit choices. Examples include: materiality determinations, impairment indicators, probability assessments for provisions, development cost capitalization criteria, and control assessments for subsidiaries. IFRS’s principles-based nature creates more such areas than rule-based systems like US GAAP.
How does IFRS compare to US GAAP in overall approach?
IFRS is more principles-based, focusing on general guidelines with professional judgment, while US GAAP is more rules-based with detailed implementation guidance. IFRS permits more measurement options (particularly fair value), while US GAAP has more industry-specific rules and bright-line tests. IFRS is shorter (around 3,000 pages vs. 25,000+ for US GAAP).
How does IFRS’s ‘fair presentation override’ compare to other GAAPs?
IFRS (IAS 1) permits overriding specific requirements in ‘extremely rare circumstances’ where compliance would be misleading, contrasting with US GAAP which generally prohibits overrides. This reflects IFRS’s principles-based approach versus US GAAP’s rules-based approach. Many Continental systems (Germany, Japan, China) traditionally had no such override provision.
How do inventory valuation requirements differ between IFRS and major national GAAPs?
IFRS (IAS 2) permits FIFO or weighted average but prohibits LIFO. US GAAP allows LIFO, FIFO, and weighted average. German, Italian, and Japanese traditional GAAPs permitted LIFO. French consolidated allowed LIFO but unconsolidated prohibited it.
This represents a major IFRS-US GAAP difference driven by tax considerations.
How do cash flow statement requirements differ between IFRS and major national GAAPs?
IFRS (IAS 7) requires cash flow statements with operating, investing, and financing sections, similar to US GAAP. However, IFRS offers more classification options for interest and dividends. Traditional German and Italian GAAPs did not require cash flow statements at all.
This demonstrates greater Anglo influence on IFRS in this area.
How do approaches to prior period adjustments differ between IFRS and national GAAPs?
IFRS (IAS 8) requires retrospective correction of prior period errors by restating comparative information, similar to US GAAP. German and French traditional systems treated such adjustments through the current income statement.
This reflects the Anglo-American influence on IFRS for this topic.
How do PPE measurement approaches differ between IFRS and major national GAAPs?
IFRS (IAS 16) offers a choice between cost model and revaluation model (with fair value changes to OCI). US GAAP, Japanese GAAP, and Chinese GAAP require historical cost only. UK historically permitted revaluations.
This represents a significant IFRS-US GAAP difference, with IFRS providing more fair value options.
How do pension accounting requirements differ between IFRS and national GAAPs?
IFRS (IAS 19) requires defined benefit obligations to be discounted and remeasurement gains/losses to go 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 foreign currency translation approaches differ between IFRS and national GAAPs?
IFRS (IAS 21) requires gains/losses on monetary balances to go to income statement immediately. Traditional French GAAP deferred such gains until settlement.
This reflects greater conservatism in Continental systems versus IFRS’s focus on economic reality. German and Japanese approaches were similarly conservative before IFRS convergence.
How do capitalization requirements for borrowing costs differ between IFRS and national GAAPs?
IFRS (IAS 23) requires capitalization of borrowing costs on qualifying assets, similar to US GAAP. German, French, and traditional UK GAAP permitted but did not require capitalization.
This change represents IFRS moving away from traditional European optional approaches toward a mandatory US-style approach.
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. US GAAP uses a two-step approach first testing with undiscounted cash flows. IFRS requires impairment reversals when appropriate, while US and Chinese GAAPs prohibit reversals for most assets.
How do provision recognition criteria differ between IFRS and national GAAPs?
IFRS (IAS 37) recognizes provisions only for present obligations with probable outflows that can be reasonably estimated. Traditional German GAAP allowed more extensive provisions for future uncertainties. US GAAP has similar criteria to IFRS but with different probability thresholds.
This represents IFRS limiting the Continental tradition of prudence-based provisions.
How do intangible asset recognition approaches differ between IFRS and national GAAPs?
IFRS (IAS 38) requires capitalization of development costs when specific criteria are met, while US GAAP generally requires expensing (except for software). IFRS permits revaluation of intangibles with active markets, while US, Japanese, and Chinese GAAPs require cost-only approach.
This demonstrates IFRS’s greater openness to capitalization and fair value.
How do investment property accounting approaches differ between IFRS and major national GAAPs?
IFRS (IAS 40) uniquely offers a fair value option for investment properties with changes to income statement. US GAAP, French GAAP, and Japanese GAAP generally require cost model only.
This represents one of the most significant measurement differences between IFRS and other major systems, reflecting IFRS’s greater emphasis on current values.
How do share-based payment approaches differ between IFRS and national GAAPs?
IFRS (IFRS 2) requires expense recognition from grant date, similar to US GAAP. Traditional French and German GAAPs often had no recognition requirements.
This represents newer IFRS standards adopting Anglo-American approaches rather than Continental traditions, reflecting modern investor-focused reporting needs.
How do goodwill accounting approaches differ between IFRS and major national GAAPs?
IFRS (IFRS 3) requires impairment testing without amortization, similar to US GAAP. Traditional German, French, 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 away from European traditions.
How do held-for-sale asset treatments differ between IFRS and national GAAPs?
IFRS (IFRS 5) requires separate classification and special measurement for assets held for sale, similar to US GAAP. Traditional German and French GAAPs had no special treatment. This represents another area where IFRS adopted Anglo-American approaches rather than Continental traditions.
How do financial instrument measurement approaches differ between IFRS and national GAAPs?
IFRS (IFRS 9) requires fair value for most equity investments, with complex classification for debt instruments based on business model and cash flow characteristics. Traditional German and French GAAPs emphasized historical cost. US GAAP has similar but not identical categorization. This represents IFRS’s greater emphasis on fair value compared to Continental traditions.
How do subsidiary definition and consolidation approaches differ between IFRS and national GAAPs?
IFRS (IFRS 10) defines subsidiaries based on control considering power, exposure to variable returns, and ability to use power to affect returns. US GAAP traditionally emphasized legal control through majority voting rights. This represents IFRS’s greater focus on economic substance over legal form compared to even US GAAP.
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 completion of earnings process. This represents a major area where IFRS and US GAAP deliberately converged through joint project.
How do lease accounting approaches differ between IFRS and national GAAPs?
IFRS (IFRS 16) requires capitalization of all leases (with minor exceptions) similar to current US GAAP. 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 represents IFRS moving toward complete capitalization approach.
