For those of you who don’t know. IFRS is International Financial Reporting Standards. They are a body of professionals independent of country that create standards for all countries to follow. They aim to create an international standard so that as the global market grows, investors can have comparability and consistency among reporting methods. This has yet to be implemented in the United States but is up for debate.
I realize that this is an insanely huge topic. But I thought it would be good just to throw around some common differences that I found.
I remember back several years ago they changed the US CPA exam so that it included a lot more changes for IFRS (should be pronounced by sounding out each letter instead of making it a word – or so I’m told). This must have made the CPA exam study people very happy. They advertised that their review material had all the changes.
But what were these changes? I have heard lots of things about the differences between IFRS and US GAAP. But in general they say that IFRS is less specific. What does this mean? Well as accountants we love rules. It’s always easier to tell a manager that they need to change something because of a rule. If you tell them they need to change something because you “believe” it is wrong then it’s much more difficult to get them to change it.
Capital vs Expense is a huge debate in the company I once worked for. It wasn’t exactly GAAP but the company had come up with a set of rules to define what should be capitalized and what should be expensed. But the criteria were somewhat vague. So a project manager would come up to me and ask if something could be capital and give me a quick description. I would think about it and normally give an answer. Then they would put together quotes and analysis and send it to me. After further review I sometimes decided that it could not be capital and they needed to expense it. This would enrage them because they were held to a certain budget and didn’t want to change it. I had to come up with a way to prove to them it was a rule and not an opinion.
We don’t like opinions but looks like this IFRS thing has lots of room for interpretation. But if you think about it that can be a good thing because it gives us more reason to create consulting gigs and show off our “expertise”. But I think it also pushes accountants to asses each situation individually and make a better decision. I think this is a huge difference and will require accountants to have more open discussions and understand core business ideas much more in-depth
What are some of these differences?
We like specifics. So let’s talk specifics. Here are a few examples of the differences:
- Inventory Costs – IFRS does not allow LIFO (last in first out)
- Intangibles – recognized at fair value. This could potentially create a huge valuation gap. We love our historical cost approach in US GAAP but having to change the valuation each year will be very different. I’m sure many people will not want to use this approach if it affects them negatively.
- Write Downs – IFRS allows write downs to latter be written back up. This kind of goes against our natural grain as US GAAP accountants. We feel the conservative method would be to allow write downs but not write ups. I guess we’ll just have to change.
- Revenue Recognition – less guidance in IFRS. I could probably write an entire new post just about rev rec… actually probably an entire series of posts. But in general we know that this is a sticky subject. Most companies want to recognize revenue early but we are trained to be conservative. Without the strict rules of US GAAP, we may lose the battle. I’m sure as a result many companies’ revenue will rise.
Overall, it’s the specific things verses the general things. Let’s get more firm and more direct. We need to make decisions and explain why it’s beneficial without the rules to back us up. We know what to do.