INTERNATIONAL FINANCIAL REPORTING STANDARDS
A Comprehensive Overview
IFRS vs US GAAP | IFRS 15 | IAS 2 | IFRS 16 | IAS 1
CONTENTS
1. Conceptual Differences: IFRS vs US GAAP
2. Revenue Recognition under IFRS 15
3. Inventory Valuation under IAS 2
4. Accounting Treatment under IFRS 16 (Leases)
5. Presentation of Financial Statements under IAS 1
1. Conceptual Differences: IFRS vs US GAAP
1.1 Overview
IFRS (International Financial Reporting Standards) and US GAAP (Generally Accepted Accounting
Principles) represent the two dominant financial reporting frameworks worldwide. While both aim to
provide transparent and comparable financial information, they differ fundamentally in their
philosophical underpinnings, scope, and application.
Framework Philosophy
The most fundamental distinction lies in the underlying approach:
Dimension IFRS US GAAP
Approach Principles-based: relies on broad Rules-based: extensive specific
principles and professional judgment rules, bright lines, and detailed
guidance
Standard Setter International Accounting Standards Financial Accounting Standards
Board (IASB) Board (FASB)
Adoption Used in 140+ countries; mandatory Mandatory for US public companies
for EU-listed companies (SEC registrants)
Volume of Guidance Relatively concise standards Extensive, highly detailed
codification (ASC)
Overriding Objective Fair presentation; override permitted Compliance with GAAP takes
in rare cases precedence
1.2 Key Conceptual Differences
A. Financial Statement Framework
Under IFRS, financial statements must present a 'true and fair view', and in extremely rare
circumstances an entity may depart from a standard if compliance would be misleading. US GAAP
requires compliance with GAAP at all times, with no override mechanism.
B. Inventory Costing
IFRS (IAS 2) prohibits the use of LIFO (Last-In, First-Out) as an inventory costing method. US GAAP
permits LIFO, which is widely used for tax advantages. Both permit FIFO and weighted average cost.
C. Development Costs
IFRS (IAS 38) requires capitalisation of development costs once specific criteria are met (technical
feasibility, intention to complete, ability to use/sell, probable future economic benefits, adequate
resources, and ability to measure expenditure reliably). US GAAP generally requires all R&D costs to
be expensed as incurred, except for software development costs after technological feasibility is
established.
D. Asset Revaluation
IFRS permits the revaluation model for property, plant & equipment (IAS 16) and intangible assets (IAS
38), allowing assets to be carried at fair value less subsequent depreciation. US GAAP uses the cost
model exclusively; upward revaluation is not permitted.
E. Impairment Testing
Under IFRS, impairment losses on assets (other than goodwill) can be reversed in subsequent periods
if the recoverable amount increases. US GAAP prohibits reversal of impairment losses once recognised
(except for certain debt securities held as available-for-sale).
F. Investment Property
IFRS (IAS 40) provides a specific standard for investment property, allowing entities to choose between
the cost model and the fair value model. Under the fair value model, changes in fair value are
recognised directly in profit or loss. US GAAP has no equivalent specific standard; investment property
is treated like other PPE under the cost model.
G. Biological Assets
IFRS (IAS 41) requires biological assets to be measured at fair value less costs to sell. US GAAP has
no equivalent standard and typically applies historical cost principles.
i Key Takeaway
The principles-based nature of IFRS requires greater use of professional judgment. US GAAP's
rules-based approach reduces judgment but can lead to structuring transactions to meet the letter
rather than the spirit of a standard.
1.3 Convergence Efforts
The IASB and FASB have worked on convergence since the 2002 Norwalk Agreement. Significant
achievements include aligned standards on revenue recognition (IFRS 15 / ASC 606) and leases (IFRS
16 / ASC 842). However, full convergence remains elusive due to structural, political, and philosophical
differences between the two frameworks.
2. Revenue Recognition under IFRS 15
2.1 Overview and Objective
IFRS 15 Revenue from Contracts with Customers was issued in May 2014 and became effective for
annual periods beginning on or after 1 January 2018. It replaced IAS 18 Revenue and IAS 11
Construction Contracts, providing a single, comprehensive framework for revenue recognition across all
industries and transaction types.
Core Principle:
i Core Principle of IFRS 15
An entity shall recognise revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services.
2.2 The Five-Step Model
IFRS 15 establishes a five-step model for recognising revenue. All five steps must be applied in
sequence.
Step Title Description
Step 1 Identify the contract(s) A contract is an agreement that creates enforceable rights and
with a customer obligations. Criteria: approval and commitment, identifiable
rights, payment terms, commercial substance, probable
collection.
Step 2 Identify the A performance obligation is a promise to transfer a distinct good
performance or service. Goods/services are distinct if the customer can
obligations benefit on its own AND it is separately identifiable from other
promises.
Step 3 Determine the The amount of consideration expected. Includes variable
transaction price consideration (estimates using expected value or most likely
Step Title Description
amount), financing components, non-cash consideration, and
consideration payable to customer.
Step 4 Allocate the Allocate to each performance obligation based on relative
transaction price standalone selling prices (SSP). If SSP is not directly
observable, it must be estimated.
Step 5 Recognise revenue Revenue is recognised when (or as) the performance obligation
is satisfied by transferring control of a good or service to the
customer.
2.3 Point in Time vs Over Time
Revenue is recognised either at a point in time or over time. A performance obligation is satisfied over
time if any of the following criteria are met:
• The customer simultaneously receives and consumes the benefits as the entity performs (e.g.,
routine services like cleaning or payroll processing).
• The entity's performance creates or enhances an asset that the customer controls as the asset
is created (e.g., construction on customer-owned land).
• The entity's performance does not create an asset with an alternative use, and the entity has an
enforceable right to payment for performance completed to date (e.g., custom-made assets).
If none of these criteria are met, the performance obligation is satisfied at a point in time (usually on
delivery when customer obtains control).
Measuring Progress for Over-Time Recognition
Appropriate methods include output methods (units delivered, milestones reached) and input methods
(costs incurred, labour hours). The method selected must depict the transfer of control faithfully.
2.4 Variable Consideration and Constraint
Transaction price may include variable amounts (discounts, rebates, refunds, bonuses, penalties, price
concessions). These are estimated using:
• Expected value method: probability-weighted amount across possible outcomes.
• Most likely amount: single most likely outcome in a contract with only two possible outcomes.
Variable consideration is included only to the extent it is highly probable that a significant reversal will
not occur when the uncertainty resolves (the constraint principle).
2.5 Contract Modifications, Assets and Liabilities
Concept Description
Contract modification A change in scope or price approved by parties. Accounted for as new
contract OR modification of existing contract depending on
circumstances.
Contract asset Entity's right to consideration in exchange for goods/services
transferred (before unconditional right). Recognised when performance
obligation satisfied but payment conditional on further performance.
Contract liability Entity's obligation to transfer goods/services for which it has received
consideration (deferred revenue). Recognised when payment received
before performance.
Incremental costs Costs to obtain a contract (e.g., sales commissions) are capitalised and
amortised if recoverable, unless the amortisation period would be ≤12
months (practical expedient).
3. Inventory Valuation under IAS 2
3.1 Scope and Objective
IAS 2 Inventories prescribes the accounting treatment for inventories, including cost determination,
subsequent recognition as expense, and write-downs to net realisable value. It applies to all inventories
except:
• Work-in-progress under construction contracts (IFRS 15).
• Financial instruments (IFRS 9).
• Biological assets related to agricultural activity at point of harvest (IAS 41).
• Certain commodity-broker-trader inventories measured at fair value less costs to sell.
3.2 Measurement at Cost
Inventories shall be measured at the lower of cost and net realisable value (NRV).
Components of Cost
Cost Component Description Examples
Purchase costs Invoice price plus directly attributable Purchase price, import duties,
acquisition costs transport, handling
Conversion costs Costs to convert raw materials to Direct labour, fixed/variable
finished goods production overheads
Other costs Costs incurred in bringing inventory to Design costs for specific customer
present location/condition orders
Excluded costs Not included in inventory cost — Abnormal waste, storage costs,
expensed as incurred admin overheads, selling costs,
foreign exchange differences
3.3 Cost Formulas (Flow Assumptions)
IAS 2 permits only two cost formulas:
Method How It Works When Appropriate
FIFO (First-In, First-Out) Assumes items purchased or produced Most common; reflects
first are sold/used first. Ending physical flow for perishables
inventory reflects most recent costs. and many other goods.
Weighted Average Cost Calculates average cost of all units Where individual items are
available. Can be periodic (total cost / indistinguishable or
total units) or perpetual (moving interchangeable.
average after each purchase).
Specific Identification Tracks actual cost of each specific For inventories that are not
item. ordinarily interchangeable;
high-value, unique items (e.g.,
jewellery, real estate).
i LIFO Prohibited under IFRS
Unlike US GAAP, IAS 2 explicitly prohibits the use of LIFO (Last-In, First-Out). LIFO can produce a
lower taxable income in inflationary environments, but IFRS considers it an inaccurate
representation of inventory flows. The same cost formula must be applied to all inventories of a
similar nature.
3.4 Net Realisable Value (NRV)
NRV is the estimated selling price in the ordinary course of business less the estimated costs of
completion and estimated costs necessary to make the sale.
Write-down to NRV is required when:
• Inventories are damaged or have become wholly/partially obsolete.
• Selling prices have declined.
• The estimated costs of completion or selling have increased.
Journal Entry — Write-down to NRV:
Account Debit Credit
Cost of Sales / Loss on inventory write-down XXX
Inventory (Allowance for NRV write-down) XXX
Reversals of previous write-downs are required when circumstances that caused the write-down no
longer exist. The reversal is limited to the original write-down amount and recognised as a reduction in
cost of sales.
3.5 Disclosure Requirements
Entities must disclose: accounting policies for measuring inventories, total carrying amount by
classification (raw materials, WIP, finished goods), carrying amount at fair value less costs to sell,
amount recognised as expense, write-downs recognised, reversals of write-downs, and inventories
pledged as security.
4. Accounting Treatment under IFRS 16 (Leases)
4.1 Background and Objective
IFRS 16 Leases was issued in January 2016 and effective from 1 January 2019, replacing IAS 17. The
fundamental change was the elimination of the off-balance-sheet operating lease model for lessees,
requiring virtually all leases to be recognised on the balance sheet.
i Key Change from IAS 17
Under IAS 17, lessees classified leases as either operating (off-balance-sheet) or finance (on-
balance-sheet). IFRS 16 introduces a single lessee accounting model: all leases (with limited
exceptions) are recognised as a right-of-use (ROU) asset and a lease liability on the balance sheet.
4.2 Identifying a Lease
A contract contains a lease if it conveys the right to control the use of an identified asset for a period of
time in exchange for consideration. Control means the customer has:
• The right to obtain substantially all of the economic benefits from use of the identified asset,
AND
• The right to direct how and for what purpose the asset is used throughout the period of use.
4.3 Lessee Accounting
Initial Recognition — At Commencement Date
Right-of-Use (ROU) Asset:
• Initial direct costs incurred by the lessee.
• Present value of lease payments (same as lease liability).
• Lease payments made at or before commencement date, less incentives received.
• Estimate of dismantling/restoration costs (if applicable per IAS 37).
Lease Liability — present value of the following unpaid lease payments:
• Fixed payments (including in-substance fixed), less lease incentives receivable.
• Variable lease payments based on an index or rate.
• Amounts expected to be payable under residual value guarantees.
• Exercise price of a purchase option (if reasonably certain to exercise).
• Penalties for early termination (if lease term reflects exercising option to terminate).
Initial Journal Entry
Account Dr/Cr Amount
Right-of-Use Asset Dr XXX
Lease Liability Cr PV of future lease payments
Subsequent Measurement
Element Subsequent Treatment P&L Impact
ROU Asset Depreciated on straight-line basis over Depreciation charge
shorter of lease term and useful life (unless
ownership transfers — then over useful life)
Lease Liability Amortised using effective interest method; Interest charge (unwinding of
reduced by lease payments made discount)
Variable lease Not part of the lease liability; recognised Expensed as incurred
payments not in when incurred
liability
4.4 Lessor Accounting
IFRS 16 did not significantly change lessor accounting from IAS 17. Lessors continue to classify leases
as:
Classification Criteria Accounting Treatment
Finance Lease Transfers substantially all risks and Derecognise asset; recognise lease
rewards of ownership to the lessee receivable at net investment value;
recognise interest income using
effective interest method
Operating Lease Does not transfer substantially all Continue to recognise the underlying
risks and rewards asset; recognise lease income on a
straight-line basis (or other systematic
basis)
4.5 Exemptions and Practical Expedients
Exemption Description
Short-term leases Leases with a term of 12 months or less at commencement date.
Lease payments expensed on straight-line or other systematic basis.
Exemption Description
Low-value assets Assets with a low value when new (IASB indicated approximately USD
5,000 as a guideline; e.g., tablets, personal computers, small office
furniture). Expensed as incurred.
Portfolio approach Permitted to apply IFRS 16 to a portfolio of leases with similar
characteristics, if this would not materially differ from applying to
individual leases.
4.6 Disclosure Requirements
Lessees must disclose: depreciation of ROU assets by class, interest on lease liabilities, short-
term/low-value lease expenses, maturity analysis of lease liabilities, carrying amounts of ROU assets,
and qualitative information about leasing activities. Lessors must disclose: nature of leasing activities,
maturity analysis of lease payments receivable, and qualitative/quantitative information about risks.
5. Presentation of Financial Statements under IAS 1
5.1 Objective and Scope
IAS 1 Presentation of Financial Statements prescribes the basis for presentation of general purpose
financial statements, to ensure comparability both with the entity's own statements of prior periods and
with other entities. It sets out overall requirements for presentation, minimum content, and
comparatives.
5.2 Complete Set of Financial Statements
A complete set of IFRS financial statements comprises:
# Statement Also Known As
1 Statement of Financial Position Balance Sheet
2 Statement of Profit or Loss and Other Income Statement / P&L + OCI
Comprehensive Income
3 Statement of Changes in Equity SOCE / Equity Statement
4 Statement of Cash Flows Cash Flow Statement
5 Notes to the Financial Statements Accounting policies and explanatory information
6 Comparative information Prior period statements (minimum one year of
comparatives)
5.3 General Features
Feature Requirement
Fair presentation Financial statements must fairly present the financial position,
performance, and cash flows of an entity. Compliance with IFRS
presumed to achieve fair presentation.
Going concern Management must assess ability to continue as a going concern. If
material uncertainties exist, they must be disclosed.
Accrual basis All financial statements (except cash flow) must be prepared on the
accrual basis.
Materiality and Similar items must be presented in aggregate. Items of dissimilar
aggregation nature/function presented separately unless immaterial.
Offsetting Assets and liabilities, income and expenses shall NOT be offset unless
required or permitted by an IFRS.
Frequency of reporting Financial statements must be presented at least annually. When period
changes, additional disclosure is required.
Comparative information Comparative information for the preceding period must be presented for
all amounts reported.
Consistency of Presentation and classification of items retained from period to period
presentation unless a change is required by an IFRS or provides more
reliable/relevant information.
5.4 Statement of Financial Position
IAS 1 does not prescribe the order or format of the balance sheet, but requires presentation of
minimum line items. The key classification requirement is the current/non-current distinction (unless a
liquidity-based presentation provides more reliable information).
Current vs Non-Current Classification
Current Asset if: Current Liability if:
Expected to be realised/sold/consumed Expected to be settled within the normal
within normal operating cycle operating cycle
Held primarily for trading Held primarily for trading
Expected to be realised within 12 months after Due to be settled within 12 months after reporting
reporting date date
Cash or cash equivalent (unless restricted) No unconditional right to defer settlement beyond
12 months
5.5 Statement of Profit or Loss and OCI
Entities may present profit or loss and OCI either in a single statement or in two separate statements.
The statement(s) must present all items of income and expense for the period. IAS 1 requires that
items of OCI be grouped into:
• Items that will not be reclassified to profit or loss (e.g., revaluation surplus changes, actuarial
gains/losses on defined benefit plans).
• Items that will or may be reclassified to profit or loss when specific conditions are met (e.g.,
foreign currency translation differences, effective portion of cash flow hedges).
Formats for Presenting Expenses
Format Expenses Classified By Common Use
Nature of Expense Raw materials, depreciation, Manufacturing entities; may better
employee benefits, etc. reflect cost structure
Function of Expense Cost of sales, selling, admin, Trading/service entities; shows gross
distribution, etc. profit
5.6 Statement of Changes in Equity
Must show for each component of equity: opening balance, profit or loss, other comprehensive income,
transactions with owners (contributions, distributions, share-based payments, dividend payments), and
closing balance.
5.7 Notes to the Financial Statements
The notes shall present information about the basis of preparation, specific accounting policies,
disclosures required by IFRS not presented in the primary statements, and information that is relevant
to understanding the financial statements. Notes are presented in a systematic manner, with cross-
references from each line item to any related note.
Note Category Content
Basis of preparation Statement of compliance with IFRS; measurement basis (historical
cost, fair value, etc.)
Significant accounting Policies for each significant item: revenue, PPE, leases, inventories,
policies financial instruments, etc.
Key judgements and Management judgements that significantly affect amounts in the
estimates statements and sources of estimation uncertainty
Specific disclosures Line-item details, maturity analyses, sensitivity analyses, related party
transactions, contingent liabilities
i IAS 1 Amendment — Classification of Liabilities (effective 2024)
IAS 1 was amended to clarify that a liability is classified as current when an entity does not have the
right to defer settlement for at least twelve months after the reporting period. This is based on rights
existing at the end of the reporting period, not management's intentions or expectations.
Summary Comparison
Standard Key Focus Primary Impact
IFRS vs US GAAP Principles-based vs Rules-based Judgment, comparability, global
framework capital markets
IFRS 15 5-step revenue recognition model Timing and amount of revenue;
eliminates industry-specific
guidance
IAS 2 Inventory at lower of cost and NRV; Balance sheet accuracy;
LIFO prohibited comparability across entities
IFRS 16 All leases on-balance-sheet for lessees Increased assets and liabilities;
reclassification of operating costs
IAS 1 Presentation and minimum content of Consistency, comparability,
financial statements transparency of reporting
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