Income statement presentation: IFRS compared to US GAAP

Here we highlight certain items common for commercial or industrial companies and how they should be presented in the income statement. Like US GAAP, the income statement captures most, but not all, revenues, income and expenses. Other items of comprehensive income (OCI) do not flow through profit and loss. Examples include the fair value remeasurement of certain equity instruments, remeasurements of defined benefit plans, and the effective portion of cash flow hedges change in fair value. However, this should not be frequent and should be reserved for items (e.g natural disasters) that justify a prominence greater than that achieved by separate presentation and disclosure.

Conclusively, companies when presenting expenses by function are expected to include additional information on the nature of expenses in the notes to the financial statements. The IFRS and US GAAP are the two common accounting standards that businesses adhere to. These accounting standards are needed gaap vs ifrs income statement to ensure that a company’s financial statements and information are accurate and can be compared to other companies’ financial statements. Regardless of the approach used, companies need to ensure the presentation is not misleading and is relevant to the understanding of the financial statements.

Difference between GAAP and IFRS

US GAAP requires that interest expense, interest income and dividend income be accounted for in the operating activities section, and dividends paid be reported in the financing section. US GAAP lists assets in decreasing order of liquidity (i.e. current assets before non-current assets), whereas IFRS reports assets in increasing order of liquidity (i.e. non-current assets before current assets). We believe the presentation of items in the income statement will continue to be a heightened area of focus and subject to future change. The IFRS income statement follows certain formatting requirements and options different from US GAAP.

IFRS does not describe events or items of income or expense as ‘unusual’ or ‘exceptional’. However, the presentation, disclosure or characterization of an item as extraordinary is prohibited. Unlike IFRS, US GAAP has no requirement for expenses to be classified according to their nature or function.

What are the Differences between US GAAP and IFRS?

The Securities and Exchange Commission won’t switch to International Financial Reporting Standards in the near term but will continue reviewing a proposal to allow IFRS information to supplement U.S. financial filings. At the same time, companies are coming to terms with increased global uncertainty – for example, from geopolitical events, natural disasters, climate effects and inflationary pressures. The IASB can be thought of as a very influential group of people who are involved in debating and making up accounting rules. However, a lot of people actually do listen to what the IASB has to say on matters of accounting.

• The standards that govern financial reporting and accounting vary from country to country.
• In the United States, generally accepted accounting principles, or GAAP, are used by businesses with public financial disclosures.
• The two main sets of accounting standards followed by businesses are GAAP and IFRS.
• GAAP prescribes that interest paid and interest received should be classified as operating activities, while international standards are a bit more flexible.
• Unusual items can include discontinued operations, lawsuits, damage from natural disasters, and restructuring costs.
• In contrast, IFRS considers each interim report as a standalone period, and while an MD&A is allowed, it is not required.

IFRS permits the use of additional line items, headings, and subtotals if the presentation is relevant to an understanding of the company’s financial performance. Expenses under IFRS can be presented on the income statement by function, for example, cost of sales, selling, or administrative activities. Under this method, companies present the cost of sales separately from other expenses. For instance, expenses may be disaggregated as personnel costs, purchases of materials, transport costs, depreciation and amortization, and advertising costs.

Disclosures and Terminology

Under IFRS, a firm can choose its own policy for classifying interest based on what it considers to be appropriate. Interest paid can be placed in either the operating or financing section of the cash flow statement, and interest received in the operating or investing sections. Whether a company reports under US GAAP vs IFRS can also affect whether or not an item is recognized as an asset, liability, revenue, or expense, as well as how certain items are classified. For example, finance costs and finance expenses are generally presented gross; so are other income and expenses. When expenses are presented by function they are allocated to, for example, cost of sales, selling or administrative activities.

The main differences come in recognizing income or profits from an investment. Under GAAP, it’s largely dependent on the legal form of the asset or contract. Under IFRS, the legal form is irrelevant and only depends on when cash flows are received. The International Financial Reporting Standards (IFRS), the accounting standard used in more than 144 countries, has some key differences from the United States’ Generally Accepted Accounting Principles (GAAP). At the conceptual level, IFRS is considered more of a principles-based accounting standard in contrast to GAAP, which is considered more rules-based. GAAP prescribes that interest paid and interest received should be classified as operating activities, while international standards are a bit more flexible.

IFRS is principles-based and may require lengthy disclosures in order to properly explain financial statements. It is the established system in the European Union (EU) and many Asian and South American countries. However, any company that does a large amount of international business may need to use IFRS reporting on its financial disclosures in addition to GAAP. GAAP addresses such things as revenue recognition, balance sheet, item classification, and outstanding share measurements.