Differences between IFRS and GAAP Accounting

  International Financial Reporting Standards (IFRS) is the accounting method that’s used in many countries across the world. It has some key differences from the Generally Accepted Accounting Principles (GAAP) implemented in the United States. 

As an accounting professional or business owner, it’s vital to know the variations of these accounting methods, in order to successfully manage your company globally, as well as domestically. Here are the top 10 differences between IFRS and GAAP accounting:

1. Locally vs. Globally

As mentioned, the IFRS is a globally accepted standard for accounting, and is used in more than 110 countries. On the other hand, GAAP is exclusively used within the United States and has a different set of rules for accounting than most of the world. This can make it more complicated when doing business internationally.

2. Rules vs. Principles

A major difference between IFRS and GAAP accounting is the methodology used to assess the accounting process. GAAP focuses on research and is rule-based, whereas IFRS looks at the overall patterns and is based on principle. 

With GAAP accounting, there’s little room for exceptions or interpretation, as all transactions must abide by a specific set of rules. With a principle-based accounting method, such as the IFRS, there’s potential for different interpretations of the same tax-related situations.

3. Inventory Methods

Under GAAP, a company is allowed to use the Last In, First Out (LIFO) method for inventory estimates. However, under IFRS, the LIFO method for inventory is not allowed. The Last In, First Out valuation for inventory does not reflect an accurate flow of inventory in most cases, and thus results in reports of unusually low income levels. 

4. Inventory Reversal

In addition to having different methods for tracking inventory, IFRS and GAAP accounting also differ when it comes to inventory write-down reversals. GAAP specifies that if the market value of the asset increases, the amount of the write-down cannot be reversed. Under IFRS, however, in this same situation, the amount of the write-down can be reversed. In other words, GAAP is overly cautious of inventory reversal and does not reflect any positive changes in the marketplace.

5. Development Costs

A company’s development costs can be capitalized under IFRS, as long as certain criteria are met. This allows a business to leverage depreciation on fixed assets. With GAAP, development costs must be expensed the year they occur and are not allowed to be capitalized.
 

6. Intangible Assets

When it comes to intangible assets, such as research and development or advertising costs, IFRS accounting really shines as a principle-based method. It takes into account whether an asset will have a future economic benefit as a way of assessing the value. Intangible assets measured under GAAP are recognized at the fair market value and nothing more.

7. Income Statements

Under IFRS, extraordinary or unusual items are included in the income statement and not segregated. Meanwhile, under GAAP, they are separated and shown below the net income portion of the income statement.

8. Classification of Liabilities

The classification of debts under GAAP is split between current liabilities, where a company expects to settle a debt within 12 months, and noncurrent liabilities, which are debts that will not be repaid within 12 months. With IFRS, there is no differentiation made between the classification of liabilities, as all debts are considered noncurrent on the balance sheet.

9. Fixed Assets

When it comes to fixed assets, such as property, furniture and equipment, companies using GAAP accounting must value these assets using the cost model. The cost model takes into account the historical value of an asset minus any accumulated depreciation. IFRS allows a different model for fixed assets called the revaluation model, which is based on the fair value at the current date minus any accumulated depreciation and impairment losses.

10. Quality Characteristics

Finally, one of the main differentiating factors between IFRS and GAAP is the qualitative characteristics to how the accounting methods function. GAAP works within a hierarchy of characteristics, such as relevance, reliability, comparability and understandability, to make informed decisions based on user-specific circumstances. IFRS also works with the same characteristics, with the exception that decisions cannot be made on the specific circumstances of an individual.

It’s important to understand these top differences between IFRS and GAAP accounting, so that your company can accurately do business internationally. U.S.-based companies must abide by specific accounting regulations, even if they plan to do business internationally.  

Amalgamation of Companies: Concept, Objectives and Procedure

Concept of Amalgamation:

Amalgamation is the blending of two or more existing companies into one company. For example, if two existing companies say, X Ltd. and Y Ltd. go into liquidation to form a new company XY Ltd., it is a case of amalgamation.

The Institute of Chartered Accountants of India has issued Accounting Standard (AS-14): “Accounting for Amalgamation” which has come into force in respect of accounting periods commencing on or after 1.4.1995 and is mandatory in nature. With the issue of this standard the terms used earlier viz. amalgamation; absorption and external reconstruction have lost their distinction. It should be noted that amalgamation includes absorption and reconstruction.

Objectives of Amalgamation:

 The main objective of amalgamation is to achieve synergetic benefits which arise, when two companies can achieve more in combination than when they are individual entities.

The other objectives of amalgamation are:

(i) To reap economies of scale

(ii) To eliminate competition

(iii) To build up goodwill

(iv) To reduce the degree of risk through diversification

(v) Managerial effectiveness.

Procedure of Amalgamation:

The following procedure is followed in an amalgamation:

1. The terms of amalgamation are finalized by the board of directors of the constituent companies.

2. A scheme of amalgamation is prepared and submitted for approval to the respective High Court.

3. Approval of the shareholders of the constituent companies is obtained.

4. Approval of SEBI is obtained.

5. A new company is formed (where necessary) and issues shares to the shareholders of the transferor company.

6. The transferor company is liquidated and all assets and liabilities are taken over by the transferee company.

Types of Amalgamation:

For accounting purposes, AS-14 has categorized amalgamation into two:

1. Amalgamation in the nature of merger.

2. Amalgamation in the nature of purchase.

Amalgamation in the Nature of Merger:

An amalgamation is considered as ‘Amalgamation in the Nature of Merger’ if all the following five conditions are satisfied:

1. All the assets and liabilities of the transferor company become the assets and liabilities of the

2. Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of amalgamation.

3. The consideration to the shareholders of the transferor company (who agree to become equity shareholders of the transferee company) is discharged by the transferee company wholly by issue of equity shares in the transferee company except that cash may be paid in respect of any fractional shares.

4. The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.

5. No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.

Amalgamation in the Nature of Purchase:

An amalgamation is in the ‘Nature of Purchase’ if any one or more of the five conditions specified for Merger is not satisfied. In such kind of amalgamation shareholders of the company which is acquired normally do not continue to have a proportionate share in the equity of the combined company. The transferee company may also not intend to continue the business of Transferor Company.

Accounting for Amalgamation:

Accounting Standard AS-14 ‘Accounting for Amalgamation’ issued by the Institute of Chartered Accountants of India states the procedure for accounting for amalgamation.

AS-14 uses and defines the various terms as under:

(a) Amalgamation means an amalgamation pursuant to the provisions of the Companies Act, 1956 or any other statute which may be applicable to companies.

(b) Transferor Company means the company which is amalgamated into another company.

(c) Transferee Company means the company into which a transferor company is amalgamated.

(d) Reserve means portion of earnings, receipts or other surplus of an enterprise (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for known liability.

(e) Consideration for the amalgamation means the aggregate of the shares and other securities issued and the payment made in the form of cash or other assets by the transferee company to the shareholders of the transferor company.