7.10 Reconciling IFRS with US GAAP in Relation to FCFF
First,
it is mandatory for both US GAAP and IFRS to provide a cash flow
statement and under IFRS revenue is recognized when all significant
risks and rewards of ownership are transferred.
Under US GAAP there can be industry specific guidelines for
revenue recognition. Revenue recognition in practice is a difficult
area for both sets of standards and the SEC has expressed concern
about revenue recognition problems including adding to their own
staff accounting bulletin (SAB) series. For example, on December 3,
1999, the SEC issued SAB 101, “Topic 13: Revenue Recognition and
Topic 13A: Views on Selected Revenue Recognition Issues.”
Here they emphasized two revenue recognition criteria:
realized (or realizable) and earned.
They also emphasized the following criteria:
·
Strong
evidence that an arrangement exists.
·
Delivery
has taken place or services rendered.
·
The
seller’s price is fixed.
·
Reasonable likelihood of collection.
As a result, this is one area that an analyst
will focus attention on the discussion of critical accounting
policies or related discussion in a 10-K or 20-F given abuses that
have occurred with revenue recognition.
Another difference is dividends and recall
that the cash flow statement consists of three sub parts.
These are cash flows from operating activities, investing
activities and financing activities.
Under IFRS dividends are reported in the income statement as
an expense which is contrary to the US GAAP treatment.
From a cash flow statement perspective under IFRS dividends
paid to providers of equity capital can be classified as either as
an operating or financing
activity. Similarly, for dividends received IFRS classifies this as
either an operating or
investing activity.
Under US GAAP, on the other hand, dividends paid to providers of
equity capital are classified as a
financing activity and
dividends received are classified as an
operating activity.
Interest expense also has subtle differences
between the two standards.
Again under IFRS interest received can be classified as
either an operating or an
investing activity whereas under US GAAP interest received is
classified as an operating
activity. For the case
of interest paid under IFRS this can be classified as either an
operating or financing
activity whereas for US GAAP it is classified as an
operating activity.
Some other notable differences lie in the
area of Goodwill, Under
IFRS it is amortized over an estimated life as an expense whereas
under US GAAP it is subject to an annual impairment test.
Negative goodwill (the excess of the fair value of net assets
acquired over the aggregate purchase price) under US GAAP is
allocated to reduce proportionally the value assigned to non-current
assets or considered as an extraordinary gain whereas under IFRS
this can pass through the income statement.
If research and development is a significant line item then again IFRS and US GAAP vary in their treatment of this. Most research costs are expensed under both models. However, for the case of development costs significant differences arise. Under IFRS these costs can be capitalized if certain criteria is met such as commercial feasibility and resources to proceed are met whereas generally under US GAAP Research and Development is generally expensed although some exceptions exist in the software industry.