US GAAP vs IFRS Differences + Cheat Sheet

Assessing whether a banking arrangement is an integral part of the entity’s cash management depends on the specific facts and circumstances and may require judgment. Components making up the total cash and cash equivalents opening and closing balances in the statement of cash flows are disclosed and reconciled to the appropriate balance sheet line items. Under IFRS Accounting Standards, the primary principle is that cash flows are classified based on the nature of the activity to which they relate. Under US GAAP, the classification of an item on the balance sheet, and its related accounting, often informs the appropriate classification in the statement of cash flows. As such, different classification and accounting for an underlying item on the balance sheet under US GAAP may result in differences in the statement of cash flows. In addition, certain differences exist between the detailed requirements of IAS 7 and ASC 230, which could affect dual preparers.

Continue your IFRS Accounting standards and US GAAP learning

• For example, finance costs and finance expenses are generally presented gross; so are other income and expenses.
• For further discussion on the differences between IFRS Accounting Standards and US GAAP, see our publication IFRS Compared to US GAAP.
• In April 2022, the IASB added a research pipeline project on the statement of cash flows and related matters, which could address discrete classification and presentation issues or result in a comprehensive review of IAS 7.
• Diversity in practice may have developed because IAS 7 refers to ‘profit or loss’, but an example to the standard starts with a different figure (profit before taxation).

The IFRS income statement follows certain formatting requirements and options different from US GAAP. There are more differences on the Cash Flow Statement, because most US-based companies use the INDIRECT method and most international companies use the DIRECT method. IFRS-based companies also have many “Reserve” categories for items such as FX translation differences and unrealized gains and losses. On the other hand, the Generally Accepted Accounting Principles (GAAP) are created by the Financial Accounting Standards Board to guide public companies in the United States when compiling their annual financial statements. GAAP stands for generally accepted accounting principles and is the standard adopted by the Securities and Exchange Commission (SEC) in the U.S. Except for foreign companies, all companies that are publicly traded must adhere to the GAAP system of accounting.

Presentation of expenses by function or nature

The guiding principle is that revenue is not recognized until the exchange of a good or service has been completed. Once a good’s been exchanged and the transaction recognized and recorded, the accountant must then consider the specific rules gaap vs ifrs income statement of the industry in which the business operates. The other distinction between IFRS and GAAP is how they assess the accounting processes – i.e., whether they are based on fixed rules or principles that allow some space for interpretations.

IFRS vs. U.S. GAAP: What’s the Difference?

Under US GAAP, the rental proceeds are also classified as operating activities. However, the classification of the cash flows from the purchase and sale of equipment depends on which activity is predominant – rental or sale. This absence of definitions may lead to differences in practice between amounts reported as restricted cash under IFRS Accounting Standards and US GAAP. Under US GAAP, defined benefit pension plans that present financial information under ASC 9603 and certain investments companies in the scope of ASC 9464 may be exempt from presenting a statement of cash flows. The IFRS allows for judgment when determining what to present and how to present it, rather than prescribing a format or specifying all the possible items. Even though the IFRS does not define gross profit, operating results, or many other common subtotals, there’s flexibility under this standard when adding and defining new line items in the income statement.

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• The IASB is conducting a standard-setting project on the primary financial statements to provide clarity on subtotals in the income statement, non-GAAP financial measures and unusual or infrequent items.
• Under this method, companies present the cost of sales separately from other expenses.
• We believe it is more appropriate to follow the standard (i.e. start with profit or loss), because the example is illustrative only and does not have the same status as the standard.

The statement of cash flows prepared under IAS 7

If a financial statement is not prepared using GAAP, investors should be cautious. Also, some companies may use both GAAP- and non-GAAP-compliant measures when reporting https://www.bookstime.com/ financial results. GAAP regulations require that non-GAAP measures are identified in financial statements and other public disclosures, such as press releases.

• Debts that the company expects to repay within the next 12 months are classified as current liabilities, while debts whose repayment period exceeds 12 months are classified as long-term liabilities.
• The recognition of gains and losses is also a factor when comparing IFRS vs GAAP income statement presentations.
• For publicly-traded companies in the US, these rules are created and overseen by the Financial Accounting Standards Board (FASB) and referred to as US Generally Accepted Accounting Principles (US GAAP).
• However, offsetting is permitted in more circumstances under US GAAP than under IFRS.
• The second one I’d say to remember is the revaluation that IFRS allows you to revalue your long-term assets.

• A type of item that is clearly unrelated to, or only incidentally related to, the normal and usual activities of the company can be defined as unusual.
• The IFRS is a set of reporting principles (rather than guidelines) that are dictated by the International Accounting Standards Board (IASB).
• Under IFRS, the development cost is purely treated as an expense in the income statement.
• The important difference from this change, that companies with leases may see a material increase in non-current assets and the corresponding debt obligations on their balance sheets, is relevant for both US GAAP and IFRS.
• Such judgment should primarily consider the nature of the activity (rather than the classification of the related items on the balance sheet), as mentioned above.