CASE STUDY: IFRS ADOPTION IN THE U.S. ASSIGNMENT
CASE STUDY: IFRS ADOPTION IN THE U.S. ASSIGNMENT
Lisa Borgese
School of Business, Liberty University
BUSI 532 Advanced Financial Statement Analysis
Dr. Debra Touhey
July 23rd, 2023
CASE STUDY: IFRS ADOPTION IN THE U.S. ASSIGNMENT
Introduction
Generally Accepted Accounting Principles (GAAP) and International Financial Reporting
Standards (IFRS) are the primary accounting standards that are used in creating financial
reports.
In the United States, companies use GAAP, which is regulated by Financial Accounting
Standards Board (FASB), while the rest of the world uses IFRS, which is regulated by The
International Accounting Standards Board (IASB). GAAP has often been defined as rules-based
accounting, which has bright line tests, allows for exceptions, and is incredibly detailed
oriented, whereas IFRS approach is often described as principles-based accounting, which gives
general descriptions of the objectives and allows for more judgment in the interpretation of the
objectives. The purpose of this case study is to analyze the similarities and differences between
IFRS and GAAP regarding accounting for property, plant, and equipment.
Similarities
Though it is not mandatory that GAAP and IFRS use a single depreciation method, both
accounting standards record depreciation using straight-line depreciation is applied to the asset
and a separate account to accumulated depreciation. “Property, plant, and equipment related
to hydrocarbon production activities are depreciated on a unit-of-production basis over the
proved developed reserves of the field concerned.” (Revsine et al., 2021) Unit-of-product
depreciates the asset based on the number of units it produces instead of the life that is left.
Straight-line depreciation is used when the assets useful life is different from the lifetime of the
field. According to Green et al., “straight-line depreciation appears to be a simple procedure
unsupported by economic logic and is commonly used internationally for allocating fixed assets
cost to account periods by way of depreciation charges.” (Green et al., 2002) The formula to
calculate straight-line depreciation is by dividing the assets depreciable by the estimated useful
life.
CASE STUDY: IFRS ADOPTION IN THE U.S. ASSIGNMENT
Another similarity between GAAP and IFRS is intangible long-lived assets. “IFRS rule that
allows firms to capitalize development expenditures is similar to U.S. GAAP per FASB ASC Topic
985–20-25, which allows computer software development costs to be capitalized after firms
establish the “technological feasibility.”” (Revsine et al., 2021) However, there are also
differences regarding intangible long-lived assets that will be addressed in the next section.
Differences
One difference between GAAP and IFRS is that depreciation method is calculated from
what is capitalized and what is expensed. In the Royal Dutch Shell case, the cost of exploration
would include inspection costs and capitalization of software cost, hence GAAP would include
this as part of the entire cost and record as depreciation for the entire asset. Whereas IFRS
capitalizes software costs and amortizes it over a five-year period, not added as a whole on the
asset (Revsine et al., 2021) “IFRS requires component depreciation when patterns of economic
benefits differ from the main asset, whereas U.S. GAAP does not. In U.S. GAAP, component
depreciation is permitted but not required.” (Lasker, 2011) In the case, one can see that IFRS
breaks down the cost of each item with a different timeline:
Property, plant, and equipment:
Refineries and chemical plant: 20 years life
Retail service stations: 15 years life
Upgraders: 30 years life
Intangible assets:
Software: 5 years life
Trademarks: 40 years life
Although both methods allow the capitalization of the development expenditures, GAAP
only allows the expense if it pertains to the industry, whereas IFRS allows the expenditure over
all the industry. (Revsine et al. 2021)
CASE STUDY: IFRS ADOPTION IN THE U.S. ASSIGNMENT
Another difference between GAAP and IFRS accounting approaches would be in regard
to impairments. Under GAAP, “impairment loss occurs if the carrying value exceeds the
recoverable amount, defined as the higher of the asset’s fair value (less costs to sell) and its
value in use, which is the discounted net cash flows.” (Revsine et al., 2021) According to
Kasztelnik, “Under IFRS, an impairment occurs when the carrying value of an asset exceeds its
recoverable amount.” (Kasztelnik, 2015) Since discounted net cash flows were used, instead of
undiscounted net cash flows, IFRS guidelines may initiate an impairment loss, which may not be
triggered by GAAP. If a write-down occurs, IFRS would reduce the carrying value to either the
discounted cash flows or the fair value minus the selling costs, however in contrast, GAAP will
only reduce the carrying value to the fair value.
The last difference pertaining to impairments between GAAP and IFRS is regarding the
reversal of impairments. Unless related to goodwill, impairments are reversed if necessary to
the extent that the circumstances that initiated the original impairment have changed and are
now recorded in depreciation, amortization, and depletion. (Revsine et al., 2021) Under IFRS,
when the circumstances involving the loss are resolved, the impairment is immediately
reversed, whereas GAAP rules do not allow for restoration of a previously recognized
impairment and therefore the company’s assets are subjected to a less vigorous recoverability
test. (Hong et al., 2018)
Conclusion
The primary purpose of IFRS and GAAP is to ensure transparency, fairness, and
consistent and accurate financial reporting according to the principles of each standard.
Proverbs
16:11 states, “Honest weights and scales are the Lord’s; All the weights in the bag are His work.”
(King James Bible, 1769/2017, Proverbs 16:11)
CASE STUDY: IFRS ADOPTION IN THE U.S. ASSIGNMENT
References
Green, C. D., Grinyer, J. D., & Michaelson, R. (2002). A Possible Economic Rationale for
Straight-Line Depreciation. Journal of Accounting, Finance, and Business Studies, 38(1),
91-120. doi: https://doi.org/10.1111/1467-6281.00099
Hong, P., Paik, D. G., & Smith, J. (2018). A Study of Long-Lived Asset Impairment Under U.S.
GAAP and IFRS Within the U.S. Institutional Environment. Accounting Faculty
Publications. Retrieved from https://scholarship.richmond.edu/cgi/viewcontent.cgi?
article=1034&context=accounting-faculty-publications
Kasztelnik, K. (2015). The Impairment of Long-Lived Assets and Reversing Revaluation Review
under US GAAP VS. IFRS Models in the United States. Accounting and Finance
Research, 4(3), 106-113. doi:http://dx.doi.org/10.5430/afr.v4n3p106
King James Bible. (1769/2017). Retrieved from King James Bible Online:
https://www.kingjamesbibleonline.org
Revsine, L., Collins, D. W., Johnson, W. B., Mittelstaedt, H. F., & Soffer, L. C.(2021). Financial
Reporting and Analysis (8th ed.). New York, NY; McGraw-Hill Education.
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