ABOUT THE AUTHOR

Prof. Vinit Mehta is a qualified Chartered Accountant, certified Financial Risk Manager (F.R.M.) & has
cleared CFA Level II.

He is a Professor of Finance teaching CFA & FRM students and a visiting faculty at NMIMS & SP Jain.

He brings a decade long experience acros s varied finance verticals s uch as investment
banking, corporate banking, international banking & structured financing. Working on cros s
- border and regional deals , for clients bas ed in Europe, Asia, Middle East & African markets ,
allows him to meld his learnings into his teachings . This mapping of theory with its practical
application, gives students an opportunity to not only learn the concepts but live them practically.

IFRS v/s US GAAP

CFA Level I – 2024 exams

Prof. Vinit Mehta [email protected] +91 93245 98369

Exam questions will be
based on International
Financial Reporting
Standards (IFRS), unless
otherwise specified.
When a question is based
on U.S. GAAP, it will be
stated in the question.

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Contents developed by Prof. Vinit Mehta [email protected] 93245 98369
 IFRS US GAAP
Introduction
International Accounting Standard Board (IASB) Financial Accounting Standard Board (FASB) prescribes US
prescribes IFRS GAAP
Income statement
Income statement or OCI can be presented together or Income statement or OCI can be presented together or
separately separately
Outcome of long-term contract estimated reliably Outcome of long-term contract estimated reliably
Revenue, exp & profit are recognised as the work is Revenue, exp & profit are recognised as the work is
completed. If a loss is expected, recognise immediately. completed. If a loss is expected, recognise immediately.

Balance Sheet
Financial assets include – investment securities (stocks & bonds – listed as well as unlisted), derivative, loans to and
notes receivable
Loans to, notes receivable and unlisted equity shares are valued at historical cost on balance sheet for IFRS & US
GAAP
only DEBT securities acquired with intent to be held till only DEBT securities acquired with intent to be held till
maturity – Valued at amortised cost  no terminology maturity – Valued at amortised cost  Classified as Held
for classification like US GAAP – classified as securities to maturity (HTM)
measured at amortised cost – treatment is same as
HTM securities under US GAAP Because they are held till maturity and also valued at
amortised cost, there is nothing like unrealized gains or
Because they are held till maturity and also valued at loss
amortised cost, there is nothing like unrealized gains or
loss
DEBT securities acquired with intent to collect interest only DEBT securities acquired with intent, other than to
but also sell – valued at fair value and unrealised gains / hold till maturity or to profit over near term – valued at
losses recognised in OCI  Classified as securities fair value and unrealised gains / losses recognised in OCI
measured at fair value through OCI – treatment is same  Classified as AVAILABLE-FOR-SALE (AFS) securities
as AFS under US GAAP
DEBT securities acquired with intent, other than to hold Debt securities acquired with intent to profit over near
till maturity or to collect interest & sell – valued at fair term – valued at fair value and unrealised gains / losses
value and unrealised gains / losses recognised in income recognised in income statement  Classified as TRADING
statement  Classified as securities measured at fair securities
value through income statement – treatment is same
as TRADING securities under US GAAP
By default, all derivatives & listed equity securities All derivatives & listed equity securities irrespective of the
irrespective of the intent – valued at fair value and intent – valued at fair value and unrealised gains / losses
unrealised gains / losses recognised in income statement recognised in income statement  Classified as TRADING
 Classified as securities measured at fair value securities
through income statement – treatment is same as
TRADING securities under US GAAP
Only Listed equity securities at the time of purchase can Listed equity securities cannot be classified as AFS – they
FOREVER be CHOSE to recognised at fair value and are only classified as TRADING securities. No option given
unrealised gains / losses recognised in OCI  Classified here
as securities measured at fair value through OCI –
treatment is same as AFS under US GAAP
Financial assets not falling in any of the above category – -
valued at fair value and unrealised gains / losses
recognised in income statement  Classified as
securities measured at fair value through income
statement

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Contents developed by Prof. Vinit Mehta [email protected] 93245 98369
 IFRS US GAAP
Financial assets at the time of purchase can FOREVER be No such choice under US GAAP
CHOSE to be recognised at fair value and unrealised
gains / losses recognised in income statement 
Classified as securities measured at fair value through
income statement
However, for all of above, dividend or interest income or REALISED gain / losses are recognised in income statement
Cashflow statement
Interest paid can be classified in CFO or CFF Interest paid is classified in CFO
Interest income recd. can be classified in CFO or CFI Interest income recd. is classified in CFO
Dividend income recd. can be classified in CFO or CFI Dividend income recd. is classified in CFO
Dividend paid can be classified in CFO or CFF Dividend paid is classified in CFF
Taxes reported as operating activity unless it is related All taxes paid are part of CFO, even tax related to investing
to investing or financing activities or financing transaction
Not required under IFRS Firms using direct method presentation, must also disclose
indirect method presentation
Bank overdraft considered part of cash equivalents i.e. Bank overdraft considered part of CFF
cash balance itself
Inventories
Specific identification, FIFO & Weighted average cost Specific identification, FIFO, LIFO & Weighted average cost
Valued @ lower of cost or NRV – for all above methods Valued @ lower of cost or NRV – for all above methods
except LIFO or retail method
For LIFO or retail method – lower of cost or Market.
 Market = replacement cost; if replacement cost is
in the range of NRV or NRV minus profit
 Market = NRV; if replacement cost > NRV
 Market = NRV minus profit margin; if replacement
cost < NRV minus profit margin
 Shortcut  Market is always the middle value
amongst NRV, replacement cost, and NRV minus
profit margin – put these numbers in ascending
order and you get the middle value which is the
Market. Now compare this Market with Cost and
use the smaller number as value of inventory.
Write down by recognising loss in income statement Small write down amount – recognise by increasing COGS
Large write down amount – recognise loss
Subsequent Write-up – recognise gain by decreasing No write ups allowed
COGS to extent of earlier loss
Change in inventory method – firms to demonstrate that Change in inventory method – firms must explain why the
change will provide reliable & more relevant info. change is preferable
Long Term Assets
Construction interest to be capitalised Construction interest to be capitalised
Research cost expense it in income statement Research cost expense it in income statement
Development cost capitalise it as an asset on the balance Development cost expense it in income statement
sheet  Exception: Software – capitalise it as an asset on the
balance sheet
Impairment

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Contents developed by Prof. Vinit Mehta [email protected] 93245 98369
 IFRS US GAAP
Indication of impairment: Assess annually if events or Indication of impairment: Assess annually if events or
circumstances indicate impairment (eg. Natural calamity circumstances indicate impairment (eg. Natural calamity
damaging asset or new technology outdating old asset) damaging asset or new technology outdating old asset)
When to assess: Annually When to assess: Annually
When to test for impairment: Only when events or When to test for impairment: Only when events or
circumstances indicate, except annually for intangibles circumstances indicate, except annually for intangibles
assets with indefinite lives (eg. Goodwill) assets with indefinite lives (eg. Goodwill)
How to test impairment: carrying value > recoverable How to test impairment: carrying value > undiscounted
amount. future cashflow stream.
Recoverable amount is greater of: Impairment loss recognised on income statement =
• Fair value less selling cost Carrying value minus fair value (do not consider selling
• Value in use i.e., PV of future cashflows cost here)
from continued use  if fair value is not available, then use discounted
Impairment loss recognised on income statement = future cashflow
Carrying value minus recoverable amount Reversal: Not allowed here
Reversal:
If value recovers in future, impairment loss can be
reversed to the extent of loss recognised earlier
Asset reclassified from held for use to held for sale – impairment
As asset is not used anymore, hence no dep. or amort. As asset is not used anymore, hence no dep. or amort.
Tested for impairment  carrying value > net realizable Tested for impairment  carrying value > net realizable
value value
Where, NRV = fair value less selling cost Where, NRV = fair value less selling cost
Impairment loss = carrying value minus NRV Impairment loss = carrying value minus NRV
Reversal: Reversal:
If value recovers in future, impairment loss can be If value recovers in future, impairment loss can be
reversed to the extent of loss recognised earlier reversed to the extent of loss recognised earlier

This is the only place in US GAAP where reversal is allowed

Cost Model (IFRS & US GAAP)
Cost Model allowed:

Amortized cost = Original capitalised cost minus accumulated depreciation / amort / depletion / impairment

Lease accounting
In the books of lessee: In the books of lessee:

All the lease to be classified as finance lease, except If either of the following circumstances exist, classify the
short term lease of less than 12 months or where the PV lease as finance lease:
of lease payment is less than $5,000 • The lease transfers ownership of the underlying asset
to the lessee or
• The lessee has an option to purchase the underlying
asset and is reasonably certain it will do so
• The lease term is for a major part of the asset’s useful
life
• The present value of the sum of the lease payments
equals or exceeds substantially all of the fair value of
the asset
• The underlying asset has no alternative use to the
lessor

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Contents developed by Prof. Vinit Mehta [email protected] 93245 98369
 IFRS US GAAP
If none of the above condition exists, classify as operating
lease
In the books of lessee (Finance lease) In the books of lessee (Finance lease)

At inception: At inception:

Recognise lease liability = PV of lease payment Recognise lease liability = PV of lease payment
Recognise ‘Right of Use’ asset = PV of lease payment Recognise ‘Right of Use’ asset = PV of lease payment

Over the term of lease: Over the term of lease:

Charge depreciation on ROU asset Charge depreciation on ROU asset

Recognise interest expense = lease interest rate x Recognise interest expense = lease interest rate x
Beginning lease liability Beginning lease liability

Interest expense  CFO Interest expense  CFO

Principal repaid  CFF Principal repaid  CFF
In the books of lessee (Short-term or Low-value lease) In the books of lessee (Operating lease)

At inception: At inception:

No asset or liability is reported Recognise lease liability = PV of lease payment

Recognise ‘Right of Use’ asset = PV of lease payment
Over the term of lease:
Over the term of lease:
No depreciation expense or interest expense recognised
Only lease rental expense recognised in income No depreciation expense or interest expense recognised
statement Only lease rental expense recognised in income statement

Lease rental expense  CFO Each year lease liability is reduced by ‘lease rental expense
minus effective interest component’

Each year ROU asset is also reduced by the same amount

as lease liability

At end of lease, both lease liability & ROU asset becomes

zero

Lease rental expense  CFO

In the books of lessor: In the books of lessor:

Classify either as finance lease or operating lease US GAAP requires the lessor to classify the lease as finance
lease if any criteria is fulfilled
 The lease transfers ownership of the underlying asset
to the lessee
 The lessee has an option to purchase the underlying
asset and is reasonably certain it will do so
 The lease term is for a major part of the asset’s useful
life
 The present value of the sum of the lease payments
equals or exceeds substantially all of the fair value of
the asset

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Contents developed by Prof. Vinit Mehta [email protected] 93245 98369
 IFRS US GAAP
 The underlying asset has no alternative use to the
lessor
None of the criteria's fulfilled, it is classified as operating
lease
In the books of Lessor: In the books of Lessor:

If there is transfer of ownership  classify as finance

lease (treatment is same as Sale type method used in US If it is finance lease:
GAAP)
At inception:
Operating lease (treatment is same as Operating lease
used in US GAAP) No effect on income statement

Balance sheet effect:

Remove asset by carrying value and
create lease receivable = PV of lease payment

No effect on cashflow statement

Over the term of lease:

Income statement effect:

No depreciation
Recognise interest income: lease interest rate x beginning
balance of lease receivable

Balance sheet effect:

Reduce lease receivable by principal repaid which is equal
to lease rental minus interest expense

Cashflow statement effect:

Interest income  CFO
Principal repaid  CFO

If it is classified as operating lease

At inception:

No effect on income statement

Balance sheet effect:

No removal of asset

No effect on cashflow statement

Over the term of lease:

Income statement effect:

Recognise lease rental income and
Charge depreciation as usual

Balance sheet effect:

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Contents developed by Prof. Vinit Mehta [email protected] 93245 98369
 IFRS US GAAP
Reduce asset by depreciation amount – amortised cost

Cashflow statement effect:

Lease income  CFO
Pension accounting
Pension  Components leading to changes in net Pension  Components leading to changes in net pension
pension asset or liability that go directly to equity as OCI asset or liability that go directly to equity as OCI are
are NOT amortised. amortised to income statement
Financial Reporting Quality
Usage of non-IFRS measures, IFRS requires: Usage of non-GAAP measures, US GAAP requires:
• Display the most comparable GAAP measure with
• Explaining the relevance of such non-IFRS measure equal prominence
• Reconcile difference between non-IFRS & • Explain as to why non-GAAP measure is useful
comparable IFRS measure • Reconcile difference between non-GAAP &
comparable GAAP measure
• Disclose other purposed for using non-GAAP measure
• Include any item that are likely to occur in future even
if reported as non-recurring
Deferred taxes
There is no specific mention of reporting DTL and DTA US GAAP requires DTL & DTA to be reported separately
separately under IFRS. Usually, companies report and are not to be netted
separately.
IFRS requires creation of DTA when the it is ‘probable’ US GAAP mentions that if the probability of non-reversal is
that sufficient taxable income will be available to more than 50%, than reduce DTA and create Valuation
recover the tax assets in the form deductions. If it is less allowance.
probable, reduce DTA and create Valuation allowance
Revaluation of fixed & intangible assets - Deferred taxes No revaluation allowed
are recognised in equity
Deferred tax asset recognition - Recognised if Deferred tax asset recognition - Recognised in full and then
“probable” that sufficient tax will be available to recover reduced if “more likely than not” that the assets will not be
the tax asset realised
Tax rate used to measure deferred tax - Enacted or Tax rate used to measure deferred tax - Enacted tax rate
substantially enacted rate
Deferred taxes are classified as non-current on balance Deferred taxes are classified as current or non-current
sheet based on the underlying asset or liability
Undistributed profit from an investment in subsidiary or Undistributed profit from an investment in subsidiary or JV
JV  Deferred taxes are recognized unless the parent or  No deferred taxes that meet indefinite reversal criterion
venturer is able to control distribution/sharing of profit
& it is probable that temp. diff. will not be reversed in
future
Undistributed profit from an investment in associate  Undistributed profit from an investment in associate 
Deferred taxes are recognized unless the investor is able Deferred taxes are recognized from temporary differences
to control sharing of profit & it is probable that temp.
diff. will not be reversed in future

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Contents developed by Prof. Vinit Mehta [email protected] 93245 98369