Organizations planning a conversion to the International Financial Reporting Standards (IFRS) from U.S. Generally Accepted Accounting Policies (U.S. GAAP) should consider the impact to their financial reporting. This article is the part of a series covering considerations for organizations contemplating a conversion from U.S. GAAP to IFRS.
The basic reporting requirements of the two standards are similar and require a statement of financial position (balance sheet), statement of profit and loss (income statement), a statement of comprehensive income, a statement of cash flows, a presentation of changes to equity, and note disclosures accompanying the financial statements. Both standards incorporate the concepts of materiality and consistency in accounting policies. U.S. GAAP does not have a general requirement to present the income statement under function or nature. IFRS permits presentation under either function or nature; however, if the expenses are presented by function, then certain disclosures about the nature of expenses must be included. While the direct method is preferred for the statement of cash flows under IFRS, both standards permit the direct or indirect method. The standards also have significant reporting differences.
First-Time IFRS Adopters
In connection with IFRS 1, First-Time Adoption of International Financial Reporting Standards, a first-time adopter must recognize all financial assets and liabilities at their opening valuations on the balance sheet. In addition, first-time adopters must present at least three statements of financial position, two statements of profit and loss, two cash flow statements, and two statements of changes in equity along with the related notes on their initial IFRS financial statements. Under IFRS, the reporting entity and all consolidated entities are required to have the same uniform accounting policies. If entities follow different polices, then consolidating adjustments are required.
IFRS has strict guidance for measuring assets and liabilities at the reporting date. Subsequent information cannot be utilized to change debt classification. Short-term loans that are refinanced after the balance sheet date cannot be considered long-term and must be presented on the balance sheet as short-term, unless a refinancing agreement existed before year-end that stated extensions were at management’s discretion. Similarly, debt associated with a covenant violation must receive a waiver before the reporting date; otherwise, an organization would have to present the liability as short-term under IFRS. Entities with multiple debt agreements subject to financial ratios should be mindful of this presentation, as it could create a domino effect impacting current ratio calculations. Under U.S. GAAP, entities are permitted get waivers before the issuance date that extend the debt beyond one year, which would permit long-term classification.
Both standards have similar reporting requirements. The accounting policies in effect in the prior annual period should still be applied other than disclosed newly adopted policies. Both standards also permit condensed interim financial statements. Under U.S. GAAP, interim periods are viewed as integral parts of a complete annual reporting period. This can result in more flexibility in allocating costs over these interim periods. IFRS treats each interim period as its own discrete reporting period and requires a strict cut-off of the valuation of assets and liabilities at the reporting date. Costs that do not meet the definition of an asset cannot be deferred, while liabilities recognized at the interim date must represent an existing liability at the measurement date.
The standards are largely converged under U.S. GAAP’s ASC 280, Segment Reporting, and IFRS 8, Operating Segments. Segment reporting is required for public entities under both standards. The segment determination under U.S. GAAP is based on products and services as well as geographic markets. Under IFRS, all entities must determine the segments based on the management approach without consideration to the form of the organization. In general, separately reported segments and aggregated segments should be presented if they account for more than 10% of the total revenue, assets or net income (loss) under both standards. Aggregation is appropriate under both standards if the segments are similar and meet specific requirements.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.