|US GAAP vs IFRS |
For decades the US financial market has stuck to accounting rules known as the Generally Accepted Accounting Principles, commonly abbreviated as U.S. ...view middle of the document...
The actual differences in the accounting treatment between the two frameworks depend on specific circumstances.
The IFRS literature that addresses consolidation consists of International Accounting Standard (IAS) 27, Consolidated and Separate Financial Statements, and SIC 12, Consolidation – Special Purpose Entities (AICPA).
The perception of IAS 27 centers on a principles-based definition of control. At its core, control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In a nutshell, IAS 27 is a list of indicators accompanied by some guidance whose purpose is to explain how that core principle of control should be applied in practice (A Pocket Comparison).
U.S. GAAP related to consolidation is primarily found in Accounting Research Bulletin No. 51, Consolidated Financial Statements, FASB Statement No. 94, Consolidation of all Majority-Owned Subsidiaries, FASB Statement No. 160, Non-controlling Interests in Consolidated Financial Statements, and FASB Interpretation (FIN) No. 46(R), Consolidation of Variable Interest Entities. In addition to the more traditional majority-of-voting-rights consolidation model, FIN 46 has introduced the variable interest model, which incorporates the concept of qualified special-purpose entities, which do not exist under IFRS. This concept, combined with a more rules-based approach of U.S. GAAP, can result in different consolidation conclusions, particularly when special purpose entities or other complex arrangements are involved. FIN 46(R) is currently under revision, and its approach may move away from a quantitative analysis to a more qualitative and principles-based analysis (FASB).
The concept of control is viewed differently by the two frameworks. Some of the major differences include that U.S. GAAP does not have a reference to de facto control as does IFRS. There also is a difference in how potential voting rights are used to assess control. U.S. GAAP includes specific exemptions for certain investment companies that are allowed to carry their investment at fair value. Under IFRS, if control is ascertained according to the core principle, line-by-line consolidation must be undertaken (A Pocket Comparison).
On top of the concept of control, the next few paragraphs will show some specific differences between consolidation procedures of GAAP and IFRS. Fair value is used for majority interest’s share, and minority interest is reported at pre-acquisition book value under GAAP. In comparison for IFRS, assets and liabilities are recorded at fair value, including minority interest’s share as well.
Under GAAP, deferred tax recognized only after date of acquisition is used to offset goodwill, then offset intangible assets, and finally to offset tax expense. Subsequent creation of allowance for tax assets are recognized in acquisition transactions effected via a charge to tax expense. IFRS states deferred tax...