Justin D. Bost
Issues in Accounting
4/7/10
IFRS and US GAAP
 Presentation of Financial Statements: IAS 1
o 2-1. Entities may present their statement of profit and loss using the nature
of expense method or the function of expense method. Discuss the value
of each method.
 The nature of expense method focuses on the type of expense
itself, whereas the function of expense method focuses on the
nature of the activity that the expense relates to.
o 2-3. Review the balance sheet for L’Oreal (2007 Annual Report). Discuss,
comparing with how balance sheets are currently presented in North
America.
 Key Differences Between IFRS and US GAAP
5. How does the IFRS balance sheet approach to revenue recognition differ
from the US GAAP approach?
 Revenue is viewed as the gross inflow of economic benefits during
the period arising in the course of the ordinary activities of an
entity when the inflow results in an increase in equity. US GAAP
allows both % of completion and completed contract while IFRS
only allows % of completion.
7. How do US GAAP and IFRS differ with regard to recognition of purchase
commitments?
 Future commitments are recognized if meets criteria that is similar
to criteria for US GAAP.
9. What are two main differences in inventory accounting between US
GAAP and IFRS?
 The first is that IFRS specifically forbid the use of LIFO and there
could be a change in tax law permitting LIFO for tax purposes
without mandating its use for financial reporting would eliminate
this barrier. The second being that IFRS defines market as net
replacement value and prohibits the reversal of write downs is
replacement costs subsequently increases but IFRS does not.
11. What is revaluation; to what does it apply; and how would it result in a
revaluation surplus? Where does the revaluation surplus appear in the
financial statements?
 Revaluation recognizes a change in the fair value of an asset after
its initial acquisition. IFRS permits it for tangible and identifiable
long-term assets and require it for investment properties and for
agricultural products. When revaluation results in an increase or
decrease and debit or credit is made to an equity account
(revaluation surplus or loss account) which is located on the
balance sheet or any access is charged to income.
16. What is the difference in accounting for research and development cost
between US GAAP an IFRS?
 US GAAP requires both research and development costs to be
expensed as incurred. By contrast, IFRS require research costs to
the expensed but development costs to be capitalized and
amortized. Under IFRS, in-process research and development
costs, acquired as part of a business combination, are capitalized,
amortized, and are subject to impairment tests. For now, GAAP
requires expensing of in-process research and development
although this may change as part of the convergence project.
18. How does the classification of minority interests, deferred tax and
liabilities, and convertible bonds and stocks differ under US GAAP and
IFRS?
 US GAAP classifies convertible bonds as debt and convertible
stock is classified as equity. IFRS uses “split” accounting for these
compound instruments. Under split accounting, the proceeds of the
financial instrument are allocated between its debt component at
fair value and it equity component at the residual value.
Under US GAAP, deferred income tax assets and liabilities are
classified based on the classification of the related asset or liability.
Thus, the classification may be either current tor non current.
Under IFRS, deferred income tax assets or liabilities are classified
only as non current.
19. What role does judgment play in deciding whether a controlling interest
exists for consolidation under US GAAP and IFRS?
 US GAAP does not give judgment a large role requiring a greater
than 50% ownership before a controlling interest exists. IFRS
place more weight on judgment rather than voting control. IFRS
consolidation is based on assessing risks and rewards, as well as
governance and decision-making activities.