Question

What are the major differences in accounting standards that one might want to be aware of when trying to compare the financial results of an American and a European company?

Answer 1

Well, there is no end to it, but i have summarised some for you below:

Accounting treatment varies between IFRS adopted by European company and US GAAP adopted by US based compnay in case of certain elements such as revenue and expense recognition, intangible assets, inventory, lease, impairment etc. One can devote his / her entire life but still not be able to note down and recall in time of need all the differences between US GAAP and IFRS. So we feel any attempt towards this will be futile. International Accounting Standard Board and Financial Accounting Standard Board are working together to bring convergence between US GAAP and IFRS. Sl. No. Area IFRS by European company US GAAP by US company (i) – a Revenue recognition with respect to the sale of goods, services When risks and rewards are transferred, control lies with the buyer, reliable estimate of revenue and certainty of economic benefit to the seller Risks and rewards are transferred, completion of delivery, evidence of sale, revenue can be determined, collectability is reasonably assured (i) – b Revenue recognition - deferred revenue receipt Discounting of future receipts at an implied interest rate Discounting to present value is allowed in limited cases (i) – c Revenue recognition - In case of construction/multi-year contracts Percentage of completion method if specific conditions are met else Recoverable Cost method. Completed contract method is prohibited Percentage of completion method if specific conditions are met else Completed contract method is used (ii) Expense recognition, with respect to share-based payments and employee benefits compensation cost is recognized on an accelerated basis only compensation cost can be recognized on a straight line or over an accelerated basis (iii) Intangibles assets w.r.t development costs and revaluation Research costs must be expensed as incurred, while development costs may be capitalized and recognized as an intangible asset. Please refer to Annexure II for more details. Revaluation is permitted if active market exists for the asset Development costs are expensed in the year they are incurred. Revaluation is not allowed. (iv) – a Inventories – Cost of inventory LIFO is prohibited LIFO is permitted (iv) – b Inventories – valuation Lower of cost or net realizable value (estimated selling price in the ordinary course of business less estimated costs of completion and sale); Write-down is recognized as a loss in the P&L of the current period Lower of cost or market value (iv) – c Inventories – write off Write-offs can be reversed (but not above the original cost) if impairment no longer exists; The write-down and reversal of inventory are recognized in profit or loss Write-offs cannot be reversed (v) Leases of land & buildings Land and building are considered separate units for leased property Land and building are considered a single unit if the fair value of the land < 25% of the total fair value of the leased property (vi) Long lived assets (Property, plant & equipment) Recorded at fair value/revalued amount / historical cost; no frequency specified for revaluation; thus carrying cost may exceed its historical value Recorded at historical value; Revaluation is prohibited; Carried at historical cost minus accumulated depreciation and impairment losses. (vii) Impairment of long lived Assets One-step impairment test; If asset’s carrying value > its recoverable amount, an impairment loss is recognized equal to the excess of the carrying amount over the recoverable amount. An impairment loss on an asset may be reversed in subsequent periods if a change in the estimates used to measure the recoverable amount has occurred. But an impairment loss recognized for goodwill must not be reversed. For explanation of terms please see below the table*. Two-step impairment test; First, the carrying amount is compared with the undiscounted cash flows expected from the asset. If the carrying amount > the undiscounted expected cash flows from the asset, an impairment loss is recognized. Second, use discounted cash flow for impairment loss calculation. Impairment loss = excess of the carrying amount over the fair value. A previously recognized impairment loss must not be reversed. (viii) Financial statement presentation, w.r.t extraordinary items and changes in equity Extraordinary items are prohibited. Changes in equity to be presented as a separate statement, disclosed in notes or a part of single combined statement. Only unusual and infrequent are allowed as extraordinary items Changes to equity are presented as a footnote or a separate statement.