When I first realized the possibility of U.S. organizations converting to IFRS, my mind went quickly to one question: “What are the specific differences between US GAAP and IFRS?” I suspect that I am not alone. However, I have had trouble getting a straight answer to this question. This is probably for several reasons. First, most CPA’s are experts in one set of guidance (likely U.S. GAAP) and so we are all in the process of learning a new set of standards and so none of us feel prepared to speak authoritatively to the differences between sets of standards. Adding to this uncertainty is the fact that a “small” difference for most organizations can be huge for a specific company or industry. In addition, preparing this analysis would be a lot of work and the differences are also changing as FASB works with the IASB to converge key differences between current IFRS and US GAAP.
Fortunately as part of their assessment of IFRS as a potential reporting standard for public companies the US Securities and Exchange Commission (SEC) has reviewed and summarized these differences. Here is their report. It is worth noting that the scope of this report excludes ongoing convergence projects as these were in process at the time of the assessment.
Here are some note-worthy differences to not-for-profits which stood out to me as I read through the document:
- Industry specific guidance – There is no doubt that the biggest impact on nonprofits is the lack of industry specific guidance. There is no equivalent to ASC 958 (FAS 116 & 117) in IFRS. This leaves significant portions of current US GAAP non-profit reporting unaddressed. There is room for voluntary application of concepts such as fund accounting. (See this post, for my analysis of how this might work under IAS 8). I personally believe there are benefits to fund accounting, but there is a risk that the information value achieved through voluntary application of fund accounting would be traded for audit and reporting efficiency leading to lower costs. The lack of specific industry guidance has other impacts as well. For example, there is no special guidance for tax exempt debt instruments sometimes utilized by healthcare organizations.
- Correction of errors – U.S. GAAP requires previously issued prior period financial statements to be corrected and re-issued when a material error is identified. Under IFRS when a material prior period error is identified, it must be corrected retrospectively in the first set of financial statements authorized for issuance after the discovery of the error. In other words past issued financial statements do not need to be restated and reissued.
- Cash and Cash Equivalents – Both sets of standards define Cash and Cash Equivalents similarly (IAS 7 & ASC Topic 305). However U.S. GAAP is more prescriptive than IFRS and so under IFRS it is possible that some investments (perhaps money market funds) may be deemed as investments rather than Cash Equivalents. Similarly an organization applying IFRS may deem certain investments with original maturities greater than 3 months as Cash Equivalents
- Inventory – IFRS does not permit the LIFO method of inventory valuation. All other methodologies allowed under U.S. GAAP (FIFO, weighted average cost) are allowed under IFRS as well.
- What does “probable” mean? – Here is a debate for you super accounting geeks. IFRS (IAS 37) says “probable” means “more likely than not to occur”; which basically means probability greater than 50%. However, US GAAP (ASC Topic 450) defines “probable” as “likely to occur”; which is generally interpreted as somewhat greater than 50%. Thus if some future event is 52% likely to occur it may be probable in Europe but not in America.
- Accruing contingent liabilities – When accruing contingent liabilities, IAS 37 directs organizations to accrue the “best estimate” as the “expected value”. If a range of equally possible amounts exists, a midpoint should be accrued. Under U.S. GAAP the minimum value of a range is to be accrued, if no amount within the range is a better estimate than any other amount.
- Uncertain tax positions – U. S. GAAP requires organizations to disclose uncertain tax positions at the specific tax position level. IFRS does require general disclosure of uncertain tax positions but the disclosure does not need to be at the specific tax position level.
These are just the items which stood out to me as I read through the SEC analysis. I do recommend you look though the detailed document if your organization is transitioning to IFRS.