10 Differences between Some National Standards and IFRS
You’ve probably heard the phrase ‘it wouldn’t do for us all to be the same’ – well that’s as true for the world of accountancy as it is in real life. Many countries around the globe still use their own accounting standards (referred to as generally accepted accounting practice (GAAP)). There are attempts being made by the International Accounting Standards Board (IASB) to get countries around the world to adopt International Financial Reporting Standards (IFRS), in the hope that eventually everyone around the world will report under IFRS to achieve consistency in accounting methodologies which will then improve comparability of financial statements. However, that’s some way off at the minute.
Because many countries use their own GAAP, there are some notable differences between what some countries do and what IFRS does. Here are ten notable differences between what some countries do with their own national GAAP and what IFRS does so you can appreciate the differences between the two.
Many companies operate what are known as Defined Benefit Pension Plans which is where an employee participates in the scheme, retires, and then receives a pension based on his or her final salary (you’ve probably heard them referred to as final salary schemes). They’re becoming less common these days and are not to be confused with Defined Contribution Schemes.
Some GAAPs do not require the defined benefit pension plan’s surplus or deficit to be recognised on the balance sheet. However, under IAS 19 Employee Benefits a company must recognise such a defined benefit pension plan’s surplus or deficit, and this surplus or deficit is calculated by the pension plan’s actuary.
Deferred tax is the method of smoothing out the differences between the accounting treatment of certain items in the financial statements against the way the same items have been treated for tax purposes and the deferred tax consequences can either be a liability (future tax charges will increase in the future as a result of the difference) or they can be an asset (future tax charges will decrease as a result of the difference).
Some GAAP do not require deferred tax assets or liabilities to be recognised due to the ‘timing difference’ approach (which focuses on when items are eventually recognised in profit or loss). Under IAS 12 Income Taxes this focuses on the ‘temporary difference’ approach (which focuses on the balance sheet and the tax that would be payable if assets were sold and liabilities settled at book value). IAS 12 requires that a company recognises deferred tax assets and liabilities in respect of all temporary differences.
Intangible non-current assets
An intangible non-current asset is a long-term asset the company will use in the business for more than one year and is shown on the balance sheet. An intangible non-current asset does not have a physical form – in other words you can’t kick it. Check out Chapter 7 for a more in-depth lowdown on these types of assets.
Some GAAP require certain costs relating to intangible non-current assets to be written off to profit or loss as and when they’re incurred. Under IAS 38 Intangible Assets a company must recognise such costs on the balance sheet if they meet the recognition criteria (which are that the costs are capable of generating revenue for the business and the costs can be measured reliably).
A share-based payment is an agreement between a company and a third party that entitles the third party to receive shares or share options of the company, or cash (or other assets) for amounts based on the price or value of the shares of the company at a future point in time provided certain conditions are met.
Some GAAP do not recognise any expense arising on a share-based payment transaction. IFRS 2 Share-based Payment requires the expense of a share-based payment to be reflected in a company’s income statement.
Provisions for liabilities
A provision is a liability of uncertain timing or amount and can arise because of either a legal, or constructive, obligation. A constructive obligation arises because of a history of past practice by the company (for example paying profit-related bonuses year on year).
Some GAAP do not recognise provisions because of a constructive obligation. However, IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires a provision to be recognised due to a constructive obligation if it can be demonstrated such an obligation exists, there’s going to be cash changing hands to settle the obligation and the amount required to settle the obligation can be measured reliably.
A finance lease is a lease which transfers all the risks and rewards of ownership of the leased asset to the lessee (the party leasing the asset).
Some GAAP do not require assets subject to finance leases to be recognised on a balance sheet. IAS 17 Leases specifically requires such leases to be recognised on the balance of companies entering into these types of lease (note IAS 17 is due to be replaced by another standard in the next couple of years).
Borrowing costs are interest charges levied by banks and finance houses for loans taken out by companies. Some companies take out loans to construct their own assets (for example a new building).
Some GAAPs permit a company to choose whether, or not, to capitalise these borrowing costs as part of the cost of constructing the asset. However, IAS 23 Borrowing Costs requires companies to recognise all such costs as part of the cost of the asset — there is no option under IAS 23 to write them off to profit or loss when they are incurred.
Buying another company
Lots of additional costs (such as legal fees, accountancy fees and due diligence fees) are incurred when a company buys another company.
Some GAAP allows these types of costs (called incremental costs) to be included in the cost of the acquisition. IFRS 3 Business Combinations requires such incremental costs to be written off to the income statement as and when they are incurred. They cannot form part of the cost of the acquisition under IFRS.
Statement of cash flows
Certain companies reporting under their own national GAAP do not have to produce a statement of cash flows in addition to the statement of profit or loss (sometimes called the income statement or profit and loss account) and statement of financial position (known as the balance sheet).
IAS 1 Presentation of Financial Statements specifically requires a company to produce a statement of cash flows as part of the company’s annual financial statements.
Some GAAP allow the use of the last-in first-out method of valuing inventories.
IAS 2 Inventories specifically prohibits this method of inventory valuation. It only allows the first-in first-out method or average cost method of valuation.