Question

What are the major differences in measuring net income between IFRS and U.S. GAAP.

Answer 1

Some of the major differences are discussed below.

Format of the Income Statement

No special format of the income statement needs to be followed under the IFRS, but GAAP prescribes a specific format to prepare one, i.e., to use a single-step or multiple-step format.

GAAP—Under a single-step format, the classification of all expenses is done by functions, and then those functions are deducted from the total income in order to derive income before tax. The multi-step format comprises a gross profit section where the cost of sales is deducted from sales, followed by the presentation of other income and expenses to reach an income before tax.

IFRS—The IFRS requires a minimum presentation of the following items in the income statement:

• revenue
• finance cost
• share of post-tax results of associates and JV (joint ventures) accounted for using the equity method
• tax expense
• after tax gain or loss that is attributable to the results and to the re-measurement of discounted operations
• profit or loss for the period

A company that shows operating results should include all the items of operating nature, even if they are of irregular or unusual nature.

Extraordinary Items

IFRS—There is a category of extraordinary items that are prohibited from being included in the income statement when it is prepared under IFRS.

GAAP—It allows this line item in the statement.

Exceptional Items

GAAP—This term is not used under GAAP, but an item of significant nature is separately disclosed in the income statement when income from operations is calculated and is also described in the notes.

IFRS—It requires a separate disclosure of those incomes and expenses that are exceptional in nature, size, or incidence in order to explain the business performance for the period. The disclosure of these items can either be on the face of the income statement (I/S) or in the notes.

Revenue Recognition

GAAP—Extensive guidelines for revenue recognition have been provided in GAAP, and they generally focus on revenue being realized and revenue being earned. According to those guidelines, revenue should not be recognized until the exchange transaction has occurred.

IFRS—There are two accounting standards that capture revenue transactions, and they are divided into four categories, including the rendering of services, sale of goods, other use of entity asset (royalties or yielding interest on investment), and construction contracts. The criteria for revenue recognition involve profitability, which means the economic benefits of transactions will flow to the entity, and revenue and cost can be measured reliably.

Software Revenue Recognition

GAAP—Under the guidance laid out by GAAP, vendor-specific objective evidence (VSOE) of fair value should be used to find out the estimated selling price.

IFRS —Under IFRS guidelines, no such rules are present.

Discounting of Revenue

GAAP—It is required in limited situations under GAAP. for example, in case of receivables with greater than one-year payment terms, or in situations like retail land sales or license agreements for TV programs or movies.

IFRS—Where inflow of cash or cash equivalent is deferred, discounting of revenue to PV (present value) is required. It may result in lower revenue because the time value part of the actual receivable is recognized as interest/finance income.

Development Cost

GAAP—Development cost is treated as an expense in the GAAP, but it is capitalized if certain conditions are satisfied.

IFRS—Under IFRS, development cost is treated as an expense.

Prior-Service Cost in Employee Benefit Plan

GAAP—This cost is recognized under other comprehensive income (OCI) at the date when amendment of the plan is adopted, and it is then amortized as income over the remaining years of services of participants to complete eligibility date or life expectancy.

IFRS—All prior service cost, whether it is positive or negative, is recognized in the profit and loss (P&L) account when the amendment takes place in the employee benefit plan, and it is prohibited to be spread over a future service period, which may give rise to volatility in P&L.

Expense Recognition—Gains and Losses

GAAP—The guidelines laid out by GAAP allow entities to either record expense related to gains and losses in a period incurred within the statement of operations, or defer those gains or losses using the corridor approach.

IFRS—Re-measurement of gains and losses is immediately recognized in OCI because there is no way they can be recognized in profit or loss. Moreover, corridor and spreading approach are prohibited under IFRS.

Accounting for Taxes

The treatment of taxes is different in terms of the timing of tax recognition related to benefit plans.

GAAP—Tax related to the contribution should be recognized as a part of the net benefit cost when the contribution is made.

IFRS—Under IFRS, such taxes on benefit plans should be included in return-on-asset or while computing benefit obligation, based on their nature. For instance, in the plan, tax payable on contribution is typically included in actuarial assumptions for the calculation of benefit obligations.