Most companies do not need IFRS or US GAAP.
Companies generally apply IFRS | US GAAP only if they have a good reason.
For EU domiciled companies, this is generally a listing on a regulated market link: europa.eu.
EU domiciled companies also often list securities on a US capital market. In this situation, many chose US GAAP to avoid the stigma associated with the SEC's IFRS exception for foreign private issuers (link: sec.gov). EU based companies may also have a US subsidiary that crosses IRS’s accrual accounting threshold (link: IRS.gov). Occasionally, they will choose US GAAP for practical reasons (for example, if they employ a CPA who knows only GAAP).
Similarly, US domiciled companies have no reason to apply US GAAP unless they register with the SEC (link: sec.gov) or cross the IRS's threshold.
As US companies rarely list securities on foreign markets, they will only face an IFRS a requirement if they set up a subsidiary in a country that requires IFRS for non-listed companies. This is highly uncommon. More often, foreign subsidiaries will be required to maintain statutory accounts (a.k.a. national GAAP) for local reporting purposes. In these situations, US GAAP is only applied internally, to generate the reports the parent uses to prepare its consolidated financial statements.
This web site has been designed for companies that do because they:
- are listed or a subsidiary of listed a company
- are preparing for a listing
- would like to present their financial statements to a suitor or private investor
- are required to apply IFRS or US GAAP by law or regulation
- have decided to apply IFRS or US GAAP for some other good reason.
In the European Union (link: europa.eu) and many countries, companies are generally obligated to use statutory accounting standards (a.k.a. national GAAP).
Applying IFRS or US GAAP is not easy. Not only are the standards detailed and complex, but applying them requires judgment, which can take accounting professionals years of practice to develop.
And, that is only the first step. Applying IFRS or US GAAP also means dealing with auditors (on a regular basis), regulators (usually when things go awry) and courts (if the situation turns bad).
Consequently, most companies try to avoid IFRS and US GAAP until they are forced to use them.
For example, one of our clients decided to apply IFRS out of patriotism.
As outlined in EC 1606/2002, IFRS must only be applied by consolidated entities that offer their securities on a regulated EU market. Member states are, however, allowed to extend this obligation to additional entities.
In most member states, this obligation is extended to banks, investments funds and other public interest entities. Some extend it further. One such state is The Slovak Republic.
In Slovakia, IFRS must be applied by entities that cross a revenue/asset/employee threshold.
The company in this example, crossed this threshold, but only it all of its international subsidiaries were included. It’s Slovak operations alone were well below.
We advised the company to simply relocate the consolidating entity to a different EU state that did not have a similar IFRS requirement. If it had done so, since it was a private company with no intention of listing on any market, it would have not had to apply IFRS on the basis of EC 1606/2002.
However, the company’s owners were proud a Slovak company had grown to become a world leader in its industry and elected to ignore this advice even though IFRS bought new responsibilities, a doubling of the accounting staff, a quintupling of the audit bill and a substantial training cost.
Practice begins with accounts.
This site publishes three charts of accounts: an IFRS specific COA, a US GAAP specific COA and a universal COA.
While all three are workable, the universal COA is most useful.
Practice continues with policies and procedures.
To present these, this site prefers illustrative examples.
Some cover the basics, while others deal with more complicated issues.
Both IFRS and US GAAP focus on principles, giving general guidance applicable to all entities. It is then up to individual companies to translate this guidance into specific policies and procedures. Any number of publications, both traditional and electronic, discuss how to do this.
Internationally, words like provisions, allowances, reserves, funds, adjustments, deferrals, costs, expenditures, etc., can mean different things to different people. However, every accountant, regardless of language, culture or background, can read debits and credits.
Unfortunately, it is not possible avoid commentary altogether.
It is, however, possible to unclutter the page
by hiding it in these windows.
Occasionally, the guidance provided by the standards is clear and easy to read, sometimes not so much.
For example, EITF 01-09 (EITF 00-14) used to require vendors to deduct the sales of goods or services to customers from revenue unless the vendors would have purchased those goods or services regardless of the related sale. It also gave examples of "arrangements labeled as slotting fees, cooperative advertising, and buydowns" that needed to be deducted.
The Task Force reached a consensus that cash consideration (including a sales incentive) given by a vendor to a customer is presumed to be a reduction of the selling prices of the vendor’s products or services and, therefore, should be characterized as a reduction of revenue when recognized in the vendor’s income statement. That presumption is overcome and the consideration should be characterized as a cost incurred if, and to the extent that, both of the following conditions are met:
a. The vendor receives, or will receive, an identifiable benefit (goods or services) in exchange for the consideration. In order to meet this condition, the identified benefit must be sufficiently separable from the recipient’s purchase of the vendor’s products such that the vendor could have entered into an exchange transaction with a party other than a purchaser of its products or services in order to receive that benefit.
b. The vendor can reasonably estimate the fair value of the benefit identified under condition (a). If the amount of consideration paid by the vendor exceeds the estimated fair value of the benefit received, that excess amount should be characterized as a reduction of revenue when recognized in the vendor’s income statement.
When ASC 606 (IFRS 15) superseded EITF 00-14, vendors now consider, as outlined in IFRS 15.71 | ASC 606-10-32-26, whether the good or service is distinct.
As outlined in IFRS 15.27.a | ASC 606-10-25-19.a, a good or service is distinct of the entity can benefit from its on its own (or with readily available resources).
As outlined in IFRS 15.27.b | ASC 606-10-25-19.b, to be distinct, the good or service must also be separately identifiable from other goods and services promised in the contract.
As outlined in IFRS 15.29 | ASC 606-10-25-21, to be separately identifiable, the goods and services cannot be: (a) inputs to produce or deliver the combined output or outputs specified by the customer, (b) do not significantly modify or customize, or be significantly modified or customized by, another good or service or (c) one be highly interdependent or highly interrelated.
And, besides example 32 which mentions shelf space arrangements, the guidance no longer gives any examples.
While the destination remained the same, the map got harder to read.
In more detail, to evaluate a payment as outlined in IFRS 15.71 | ASC 606-10-32-26, "An entity shall account for consideration payable to a customer as a reduction of the transaction price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct good or service (as described in paragraphs 26–30) that the customer transfers to the entity."
As outlined in IFRS 15.27 | ASC 606-10-25-19, a good or service is distinct if:
(a) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (ie the good or service is capable of being distinct); and
(b) the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (ie the promise to transfer the good or service is distinct within the context of the contract).
As outlined in IFRS 15.29 | ASC 606-10-25-21 ... Factors that indicate that two or more promises to transfer goods or services to a customer are not separately identifiable include, but are not limited to, the following:
(a) the entity provides a significant service of integrating the goods or services with other goods or services promised in the contract into a bundle of goods or services that represent the combined output or outputs for which the customer has contracted. In other words, the entity is using the goods or services as inputs to produce or deliver the combined output or outputs specified by the customer. A combined output or outputs might include more than one phase, element or unit.
(b) one or more of the goods or services significantly modifies or customises, or are significantly modified or customised by, one or more of the other goods or services promised in the contract.
(c) the goods or services are highly interdependent or highly interrelated. In other words, each of the goods or services is significantly affected by one or more of the other goods or services in the contract. For example, in some cases, two or more goods or services are significantly affected by each other because the entity would not be able to fulfil its promise by transferring each of the goods or services independently.
Also, anyone who has ever worked for a company from the US, UK or any other English-speaking country has surely noticed that native English speakers, especially American native English speakers, are not particularly good at communicating with non-native English speakers.
For example, to a native English speaker, it is fairly clear that over time revenue recognition is the principal while percentage of completion is the policy used to apply the principal.
To a non-native speaker, less so.
Not long ago, a client, the finance manager at a Czech subsidiary of a US based company, called in a panic.
The reason for his distress?
He had just received a new policy statement from the US.
In it he learned that starting in 2018: "The company recognizes revenue associated with a contract when or as the performance obligations within the contract are satisfied. Performance obligations are deemed to be satisfied when, or as, the control of a good or service is transferred to the customer.
"Control of a good or service has transferred to a customer when: The customer has the ability to direct the use of the asset and The customer has the ability to obtain substantially all of the remaining benefits from that good or service. Performance obligations may be satisfied at a point in time or over time. Thus, the timing of revenue recognition for a contract is impacted by how and when the performance obligations are satisfied. Following flowchart would help determining whether revenue can be recognized over time or point in time."
If this sounds familiar, it is likely because IFRS 15.31 | ASC 606-10-25-33 state: An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.
IFRS 15.33 | ASC 606-10-25-25 state: Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.
And IFRS 15.32 | ASC 606-10-25-24 point out: For each performance obligation identified in accordance with paragraphs 2230 | 606-10-25-14 through 25-22, an entity shall determine at contract inception whether it satisfies the performance obligation over time (in accordance with paragraphs 3537 | 606-10-25-27 through 25-29) or satisfies the performance obligation at a point in time (in accordance with paragraph 38 | 606-10-25-30). If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time.
What followed was not exactly a flow chart but it did have this to say about the old way of doing things: "Under the POC method revenue is recognized over the life-time of a contract in proportion to its percentage of completion. Contract progress is determined as the proportion of contract costs incurred for work performed up to date as a percentage of the estimated total contract costs."
And about the new way: "For each performance obligation that is satisfied over time, the company must determine how the progress of satisfying such an obligation will be measured in order to determine the timing of revenue recognition. The timing of revenue recognition should coincide with the transfer of control of good/service to the customer."
After reading this, he concluded the old procedure, percentage of completion using a cost to cost method, was out and an entirely new procedure, based on a transfer of control, was in.
Some companies take the time to write clear and thoughtful policy statements.
For example, one company had this to say about determining if lease includes a non-renewal penalty.
For all leases with option periods that are at the company's sole discretion, the subsidiary must make a determination at lease inception as to whether the option period is reasonably assured of renewal or if a purchase option is reasonably assured of being exercised (generally options that are not FMV options may be considered). This "reasonably assured of renewal" determination is based on the "penalty" that would be incurred if the subsidiary does not renew the lease. "Penalty" means that the lessee would forgo an economic benefit or suffer an economic detriment if it does not renew the lease. Thus, it is not a cash payment, but a loss of the ability to recover the investment in assets or continue to capture the economic benefit of restaurant profitability. Based on this, the company's includes renewal/extension periods when significant capital expenditures have been invested in the site. Thus, subsidiaries must use their own experience and the level of investment for each lease type in their portfolio to make the determination whether the option is "reasonably assured of renewal" in order to determine if option periods should be included or not.
Others prefer the Ctrl-c / Ctrl-v method, which is fine, as long as they take the time to absorb the true meaning of IFRS / US GAAP and give additional explanations where needed.
If not, it just causes confusion.
Obviously, this would require developing completely new procedures and internal controls, buying new software, extensive staff training, and months of agony until all the bugs were worked out.
All this, and no increase to his department's budget.
Imagine his relief when, after a meeting with our consultant and couple of follow-up calls between the consultant and his controller, he concluded that the timing of how revenue recognition coincided with the transfer of control of good/service to the customer could be expressed with a percentage derived by comparing cost to date with total cost. The only caveat, adequate internal controls had to be in place (they were).
IFRS 15.B18 | ASC 606-10-55-20 state: Input methods recognise revenue on the basis of the entitys efforts or inputs to the satisfaction of a performance obligation (for example, resources consumed, labour hours expended, costs incurred, time elapsed or machine hours used) relative to the total expected inputs to the satisfaction of that performance obligation.
In other words, if a company recognizes revenue by applying a percentage determined by comparing cost to date with total cost, it is using a procedure that is consistent with this paragraph even though, in the past, this method would have been known as percentage of completion measured using the cost-to-cost method.
Similarly, IFRS 15.B15 | ASC 606-10-55-17 state: Output methods recognise revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract. Output methods include methods such as surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed and units produced or units delivered.
In other words, if a company recognizes revenue by applying a percentage determined by evaluating surveys, appraisals, milestones (a.k.a. benchmarks) or time, it is using a procedure that is consistent with this paragraph even though, in the past, this method would have been known as percentage of completion measured using the efforts-expended method.
Likewise, if a company recognizes revenue by applying a percentage determined by dividing the number of units delivered by total number units to be delivered, it is using a procedure that is consistent with this paragraph even though, in the past, this method would have been known as percentage of completion measured using the units-of-delivery method.
Obviously, care must be taken to evaluate whether the percentage used clearly represents the portion of the delivery that has been transferred into the control of the customer, but that is not an accounting issue. It is an internal control issue.
There is no shortage of publications that explain accounting in general or IFRS | US GAAP in particular.
But invariably, they all prefer to talk about IFRS | US GAAP instead of showing how to apply IFRS | US GAAP.
Our company was established in the Czech Republic in 1994.
Its focus was US GAAP training for (the then newly established) subsidiaries of US companies.
Why was training so important?
While double entry accounting is double entry accounting, accounting standards are not accounting standards.
In the nineties, practically every European country had its own national accounting standard, a.k.a. national GAAP.
Even in the member states of the newly formed EU, national GAAPs varied considerably.
The European union has had an accounting directive(s) since its formation. However, as the directive gives member states a degree of flexibility, the resulting national legislation, while similar, is not identical.
Fast-forward 30 years. Most European countries still have a national GAAP.
While the recipe has been harmonized over the years, each retains its unique, national flavor.
For example, CZ GAAP still has no concept of a functional currency, requiring accounts to be kept in CZK even if a company's operations are predominantly in another currency (though this is expected to change by 2024).
This requirement can have a significant effect.
For example, one of our clients, a local subsidiary of an EU based company, experienced over 25% profitability swings in the early 2020s because its books were in CZK even though practically all its revenue, over 80% of its expenses and a large part of its debt was in EUR.
While these were “paper” differences, CZ GAAP serves as the basis for determining taxable income.
The result was that the subsidiary's parent had to fend off the subsidiary's creditors, who demanded additional guarantees because they were disquieted by the fluctuations in the subsidiary's after tax income.
In 1999, we added US GAAP advisory services.
Among the services we provide: CZ GAAP to IFRS | US GAAP reconciliation.
Not that it always yields the desired result.
For example, some time ago a Czech company decided to list on a US exchange.
After retaining an underwriter, the underwriter retained us to draft a report consistent with US GAAP.
As, unlike CZ GAAP, US GAAP distinguishes revenue/gains and expenses/losses, this was one the first adjustments.
After reviewing our preliminary results, the underwater decided against pursuing a listing.
Up to then, the company had only applied CZ GAAP.
As CZ GAAP does not differentiate between revenue and gains, when a company sells (factors) its receivables, it recognizes revenue in the amount received and an expense in the receivables' book value.
Eliminating this difference caused almost half its previously reported revenue to disappear.
In and of itself, this would have been enough to dissuade a listing, but there was more.
- In addition to the revenue eliminated by applying US GAAP guidance to factored receivables, revenue further declined because, at the time, CZ GAAP required increases in inventory and self-manufactured asset costs to be capitalized with a credit to revenue.
- The company also did not recognize the full value of its lease assets nor any associated liabilities because CZ GAAP does not require leased assets to capitalized nor liabilities to be recognized. It only requires the capitalization of advance payments, which are amortized over the lease term.
- The company also did not recognize all of its leased assets because CZ GAAP does not require capitalization of operating leases even if their term is for substantially all the underlying asset's economic life.
- The company also did not recognize all its contingent liabilities because CZ GAAP does not generally require recognition of constructive obligations.
- The company also failed to distinguish between cost of sales, selling and administrative expenses as this distinction is not required by CZ GAAP.
- The company also capitalized both development and some research as well as employee training which, at the time, was consistent with CZ GAAP.
- The company also misapplied CZ GAAP guidance, for example by using tax depreciation periods for financial reporting purposes, but an examination of these issues was beyond the scope of our engagement.
A second step was not necessary.
After reviewing our preliminary report, the underwater decided to terminate its relationship with the company, which eventually wound up in receivership.
We continued to focus on US GAAP until the European Union decided to adopt IFRS (IAS) in 2002.
The original IFRS, comprising 31 standards known as IAS, was published in 1975 (link: ifrs.org).
It was not, however, widely used until 2005, when it was adopted by the European Union.
In the twentieth century, US GAAP was, by default, the world's only internationally accepted set of accounting principles.
"[In 1995, the Commission] recognized that the existing Directives as such were not suitable for the information needs of international capital markets and consequently large companies were increasingly being drawn to use U.S. Generally Accepted Accounting Practices (U.S. GAAP) in addition to their local Generally Accepted Accounting Practices (GAAP). This increased costs and sometimes resulted in confusion when comparisons were made to local GAAP. Furthermore, at a political level, the European Union had no influence on accounting standards adopted under U.S. GAAP, nor were the standards necessarily appropriate in an E.U. context.
"For these reasons, the Commission proposed that the European Union should place its full weight behind the international standards being developed by the International Accounting Standards Committee with the objective of establishing a set of standards that would be acceptable in capital markets world-wide."
Alexander Schaub, The Use of International Accounting Standards in the European Union, 25 Nw. J. Int'l L. & Bus. 609 (2004-2005)
The IFRS standards adopted by the EU are available on its server.
While the IFRS standards published by the IASB are not law, the IFRS standards republished in the European Union's Official Journal are.
As part of its agreement with the IFRS Foundation, the EU has the make IFRS standards it has adopted (European-IFRS) available for free both in the original and in translation.
IFRS does, however, continue to be the copyrighted property of the IFRS Foundation.
Obviously, the main advantage of accessing IFRS through the EU is that access is free.
But, as always, one gets what one pays for.
Firstly, the EU only publishes those standards it has adopted.
Secondly, it does not publish supplemental ("B") guidance, such as the Basis for Conclusions, nor does its server have any features that make researching IFRS easier.
Thus, anyone who is serious about IFRS uses the full, IASB version (link: ifrs.org).
While not free, subscription has its benefits.
In addition to full access to all standards and all supplemental guidance, plus an archive of all published standards back to 1975, the site's robust search function is especially useful.
More importantly, subscribing bolsters the IASB's independence, helping it further its mission to make IFRS universally accepted throughout the world.
One reason the US SEC has not embraced IFRS is the influence the European political establishment exerts on IASB through its contributions (link: iasplus.com).
Obviously, £200 per year will not pay for the IASB's independence, but every little bit helps.
The first US GAAP comprised 51 standards published over 20 years starting in 1939.
While primarily a US system, it has been used worldwide the 1950s.
The first GAAP comprised the Accounting Research Bulletins created by the American Institute of Certified Public Accountants' Committee on Accounting Procedure (link: olemiss.edu).
The CAP was followed by the Accounting Principles Board, which took over standard setting in 1959.
The APB's opinions were GAAP (link: olemiss.edu) until 1973, when the current standard setter, the Financial Accounting Standards Board, started issuing its Statements of Financial Accounting Standards.
A summary of US GAAP's pre-codification structure:
FAS, FIN: Financial Accounting Standards Board’s Statements of Financial Accounting Standards and Interpretations
APB, AIN: Accounting Principles Board’s Opinions and Interpretation
ARB: Committee on accounting Principles’ Accounting Research Bulletins
EITF: Consensus positions
SEC: SAB Staff Accounting Bulletins, SEC rules and interpretive releases
FTB: FASB Technical Bulletins
SOP: AICPA Statements of Position
AICPA: Industry Audit & Accounting Guides
EITF: Emerging Issues Task Force Consensus positions cleared by the FASB.
AICPA’s AcSEC Accounting Standards Executive Committee Practice Bulletins
FASB Implementation guides and Q&As.
AICPA accounting interpretations
Practices widely recognized and prevalent either generally or in the industry
This structure could only be simplified after the Sarbanes-Oxley Act gave US Securities and Exchange Commission the ability to finally decide who has the right to create US GAAP.
Specifically, SOX.SEC. 108 (link: gpo.gov) gives the SEC the right to designate a standard setter, not ratify individual standards.
This provision was included to prevent the SEC from cherry-picking standards, and so limits the influence of politics and politicians on standard setting.
Before then, it was the AICPA's Council that had this ability.
Unsurprisingly, the AICPA's Council used this ability to also recognize the AICPA's pronouncements (even though they were unavailable to the lay public)
In the past, the AICPA's pronouncements were generally available to AICPA members (family and friends) only.
Like the Liturgical Latin of old, this allowed AICPA members to project an aura of Ecclesiastical like infallibility that not only enhanced their prestige, but proved quite lucrative.
Obviously, in a post Enron/WorldCom world, such an approach to standard setting is no longer consistent with standards of transparency and objectivity to which the profession is now held.
As a result, the AICPA no longer sets accounting standards.
Instead, it concentrates on its roles as the guardian of the CPA exam and profession's chief lobbyist (link: aicpa.org).
Unfortunately, some traditions die hard.
Like the AICPA of old, in addition to the FASB's standards, the SEC also recognizes its own pronouncements.
Fortunately, unlike the AIPCA of old, the SEC makes its pronouncements freely available on the ASC.
Being quasi law, US GAAP's full text cannot be sold for profit.
While US GAAP standards are not law, their use is (indirectly) mandated by law.
This implies, like law, they must be available to those they govern at no charge.
Consequently, US GAAP is available for free, even though it is, in fact, a copyrighted work, and the property of the FAF.
However, the FASB is free to charge for premium services (such as search or copy functions).
While not absolutely necessary, these services make researching US GAAP much easier.
More importantly, they give those who use US GAAP the opportunity to directly support a standard setting process that is, without question, second to none.
As the use of IFRS grew, so did demand for IFRS training and advisory, until it comprised almost 80% of our business.
Convergence reached its peak with IFRS 15 and ASC 606. It has been down hill ever since.
For example, even the best online summary link: iasplus.com fails to mention IFRS 16 and ASC 842 because, while similar, they are not converged.
However, like any rational couple with children, divorce does not mean the IASB and FASB did not stay friends.
For example, in 2022 the FASB decided to drop the idea of goodwill amortization more or less because the IASB made the same decision link: iasplus.com earlier.
While the SEC never explicitly said IFRS was out, this staff report link: fasb.org left little doubt of its true intentions.
Today, our services are divided practically evenly between IFRS and US GAAP.