Question

Consider the following scenario: You are the new chief financial officer of ABC Corp., a company in the United Kingdom, and you’ve been asked to help with the consolidation of your new U.S. subsidiary. ABC Corp. uses International Financial Reporting Standards (IFRS) accounting practices, while the subsidiary used U.S. Generally Accepted Accounting Principles (GAAP).

In your initial post, describe and compare the process when a subsidiary is consolidated under IFRS versus U.S. GAAP. Also, explain how goodwill is determined under each practice.

Answer 1

Answer

The key differences that are reflected on the financial statements while using IFRS and U.S. GAAP are as follows:

• U.S. GAAP tends to follow more rules that follow industry specific guidelines while the IFRS tends to follow more principles.
• U.S. GAAP permits all the methods of inventory valuation like LIFO, FIFO, weighted average method, whereas, IFRS does bot permit the usage of LIFO method.
• Both the methods permit the writing off of inventories if the market value remains constant. If the market value increases, writing down of inventories is not permitted under U.S. GAAP.
• Revaluation of the assets to the fair value is permitted in the case of IFRS whereas the U.S. GAAP does not permit.
• Intangible assets like goodwill, development costs are capitalized under IFRS when certain criteria is met whereas intangible assets like development costs are expensed, software costs which are used internally will be capitalized. Under IFRS or U.S. GAAP, goodwill is never amortized.
• Under IFRS goodwill is measured as the difference between the cost of acquisition and the acquirer's interest in the net fair value. On the other hand, in the case of U.S. GAAP, the goodwill is measured as the difference between the excess of cost of acquisition and the fair value of the acquired assets.