IFRS vs US GAAP, new standards and other information sources

Which differences between IFRS and US GAAP still matter?

Four, and they all move reported numbers. The two systems agree on most new standards but not on these.

IFRS are developed by the International Accounting Standards Board (IASB ). US GAAP are developed by the Financial Accounting Standards Board (FASB ). Their convergence on conceptual frameworks and existing standards was put on hold in the late 2000s, but major new standards, such as revenue recognition, leasing and credit losses, have been mostly or entirely converged.

Area	US GAAP	IFRS	What it does to the analysis
Style	Rules-based	Principles-based	More judgment under IFRS
Inventory methods	First in, first out (FIFO), LIFO, weighted average	FIFO, weighted average (no LIFO)	In rising prices LIFO shows higher cost of sales and lower profit, so adjust before comparing
Reversal of inventory write-downs	Prohibited	Permitted, up to the original write-down	IFRS earnings can bounce back
Development costs	Expensed	Capitalized when conditions are met	IFRS shows higher assets and earlier profit
Interest paid (cash flow)	Operating	Operating or financing	An IFRS filer can show higher operating cash flow

IFRS versus US GAAPthe differences that move numbers

• Style Use it IFRS principles-based, US GAAP rules-based
• Inventory Memorize
  • LIFO US GAAP only; IFRS bans it
  • Reversal of write-downs IFRS allows (up to the original write-down); US GAAP prohibits
• Development costs Memorize IFRS capitalizes when conditions are met; US GAAP expenses
• Interest paid in the cash flow statement Memorize US GAAP: operating; IFRS: operating or financing

There is no required reconciliation between the two, so the analyst often lacks the data to adjust. The practical answer is caution: do not compare ratios across systems as if they were identical.

$$\text{CFO}_{\text{op}} = \text{CFO}_{\text{fin}} - I$$

Here $\text{CFO}_{\text{fin}}$ is operating cash flow with interest paid classified as financing (an IFRS option), $\text{CFO}_{\text{op}}$ is operating cash flow with interest paid inside operating (US GAAP, and the other IFRS option), and $I$ is interest paid.

The exam can start from either side: the US GAAP figure, the IFRS figure, the interest or the percentage gap.

Compare one small company under the two systems, open the lines that change, then sort the information sources on the second tab.

Go deeper Other cash flow classifications that differ

Interest paid is the difference this module tests, but the same flexibility applies to other items. Under IFRS, interest and dividends received can be shown in operating or investing activities, and dividends paid in operating or financing. Under US GAAP, interest received, interest paid and dividends received are operating, and dividends paid are financing. The cash flow modules teach these properly.

Go deeper Why development costs and write-downs matter for earnings quality

Capitalizing a development project moves the spending from the income statement to the balance sheet, so early profit rises and assets rise. Reversing a write-down boosts income in a later period. Both give management timing flexibility, which is why the next modules and the reporting quality module treat them as areas to check.

Why must analysts keep up with changing standards?

Because changes in standards change the reported numbers, comparability and valuations, and analysts cannot rely on the data vendors to adjust. Analysts need not be accountants. An accountant watches from the preparer’s side; the analyst watches as a user and asks how a change affects the reports.

Three things to monitor:

1. New products or types of transactions. Digital assets and new fintech models can have no explicit guidance. Ask for the business purpose, the reporting, the key estimates and the cash flow implications. Some structures exist mainly for window dressing. Standard setters lag behind new products, so their actions will not reveal them.
2. Actions of standard setters and user groups. The IASB and FASB publish an exposure draft for each proposed standard, and users can send comment letters. CFA Institute members serve on liaison committees and write comment letters on users’ behalf. A change that moves an item from the notes into the statements can change how the market values a company. When employee share options became an expense, their dilutive effect, once buried in the notes, started to reduce reported profit.
3. Company disclosures about critical accounting policies and estimates, where management judgment concentrates.

Monitoring developmentsfrom the user's view, not the preparer's

• New products and transactions Use it no guidance yet; ask the business purpose
• Standard setters and user groups Use it IASB and FASB exposure drafts, CFA Institute comment letters
• Company disclosures Use it critical accounting policies and estimates

What information do analysts use beyond the reports?

Four groups, by origin. Sort a source by asking whose voice it is. Outside the company, third-party sources are either public or proprietary.

• Issuer sources outside the filings: earnings call s (webcast presentations and questions, not legally required), investor day s (ad hoc, in-depth sessions), press release s, conversations with management and investor relations, the company website, and experiencing the products as a customer.
• Public third-party sources: free industry white papers, government economic and industry indicators, general and industry news, and social media for customer sentiment.
• Proprietary third-party sources: those that are paid or restricted, such as sell-side and rating agency reports, data platforms and specialist consultancies.
• Proprietary primary research: surveys, conversations, product comparisons and store visits that the analyst conducts or commissions.

Issuer sources are management’s view and carry its bias. Analysts ask probing questions and cross-check against outside sources.

Sources beyond the filed reportsgrouped by origin

• Issuer Use it management's voice, so biased
  • Earnings calls not legally required; analysts ask questions
  • Investor days and presentations ad hoc, in depth
  • Press releases and website also products and stores as a customer
  • Management and investor relations
• Public third party Use it free to access
  • Industry white papers
  • Government economic and industry indicators
  • General and industry news; social media
• Proprietary third party Use it paid or restricted
  • Sell-side and credit rating agency reports
  • Data platforms for example Bloomberg and FactSet
  • Specialist consultancies
• Proprietary primary research Use it the analyst's own
  • Surveys, conversations, product comparisons, store visits

An analyst who visits stores and interviews shoppers is doing proprietary primary research . Industry and peer information put the company’s results in perspective, and a consumer-products analyst will usually try the product firsthand.