What is the difference between the IFRS vs GAAP income statements? The IFRS and US GAAP are the two common accounting standards that businesses adhere to. These accounting standards are needed to ensure that a company’s financial statements and information are accurate and can be compared to other companies’ financial statements. However, there are some differences and similarities between the US GAAP and IFRS requirements on how companies should present their financial statements. Hence, the requirements under IFRS vs GAAP for income statement presentation would differ in several ways.
In this article, we will be comparing the differences between IFRS vs GAAP requirements for income statements as well as the similarities between these two accounting standards. But first, let us discuss what the income statement is.
Income statement explained
An income statement is a financial statement that reports the income and expenditure of a company over a period of time. This financial statement is also known as a profit and loss statement (P&L), or a statement of revenue and expense. The US GAAP and IFRS require the components of a complete set of financial statements which include a balance sheet (or statement of financial position), an income statement, a statement of comprehensive income as well as a statement of cash flows and accompanying notes to the financial statements.
The income statement is one of the three important financial statements used for reporting the financial performance of a company over a specific accounting period. It can show the revenue, expenses, gains, and any loss incurred during the accounting period; it doesn’t include accounts such as assets, liabilities, and equity (these are found on the balance sheet) or unrealized gains from investments and loans (such would be reported in the cash flow statement).
The income statement usually covers a period of time, such as one fiscal quarter or year, and can be used to assess the financial health of a company as well as determine the profitability of the business. Hence, it gives investors the necessary information to make a decision on a company. The statement can show whether a business is generating a profit or not and if a business spends more than it earns.
Differences between IFRS vs GAAP Income Statement
- Under the IFRS, there is no special format for the income statement that needs to be followed whereas GAAP dictates a specific format in which an income statement should be prepared, i.e. either using a single-step or multiple-step format.
- Discounting of revenue to PV (present value) is required under IFRS whereas, under GAAP, it is only required in limited situations
- Under the GAAP guidance, vendor-specific objective evidence (VSOE) of fair value should be used to find out the estimated selling price of software whereas, under IFRS guidelines, no such rules are present.
- The presentation of NGFMs (non-GAAP financial measures) in financial statements is generally prohibited under GAAP whereas these measures can be used in income statements under IFRS.
- Under IFRS, the development cost is purely treated as an expense in the income statement whereas, under GAAP, it is treated as an expense, but is still capitalized if certain conditions are satisfied.
The US GAAP is an acronym for Generally Accepted Accounting Principles; this set of accounting principles is set by the Financial Accounting Standards Board (FASB) which is followed by most United States companies. The IFRS, on the other hand, stands for International Financial Reporting Standards. IFRS is dictated by the International Accounting Standards Board (IASB) and followed by many countries outside the US. Nevertheless, deciding which set of standards to use when making financial reports like the income statement would depend on whether the company operates in the US or internationally.
Here are some of the differences between the IFRS vs GAAP requirements for income statement presentation:
Difference between US GAAP vs IFRS Income Statement in terms of format and content
The format and content of the income statement are factors when comparing IFRS vs GAAP income statement presentation. IFRS doesn’t prescribe the format of the income statement whereas GAAP prescribes the format and minimum line items to be presented for SEC registrants. GAAP dictates a specific format in which an income statement should be prepared, i.e. either using a single-step or multiple-step format. Under a single-step format, the classification of all expenses on the income statement is done by functions, and then those functions are deducted from the total income in order to derive income before tax.
The GAAP multi-step format, on the other hand, comprises a gross profit section where the cost of sales is deducted from sales, followed by the presentation of other income and expenses to reach an income before tax. However, this prescribed format is applicable to SEC registrants. For non-SEC registrants under GAAP, there is limited guidance on the presentation of the income statement, just as with IFRS.
Furthermore, even though the format for an income statement is not prescribed under IFRS, certain items require a presentation, if material, either on the face of the income statement or disclosed in the notes to the financial statements. Hence, under IFRS, there are certain items that are common for commercial or industrial companies to present in the income statement. The common items that require presentation on the face of the income statement under IFRS include:
- Revenue; presenting interest revenue separately
- Finance costs
- Impairment losses related to financial instruments
- Loss or profit of associates and joint ventures
- Income tax
- Discontinued operations
Common items that may be presented on the face of the income statement ‘or’ disclosed in the notes to the financial statements under IFRS include:
- Writedowns of inventories to net realizable value
- Writedowns of property, plant, and equipment to the recoverable value
- Reversals of such write-downs
- Restructuring of the activities of a company and reversals of any provisions for the costs of restructuring
- Losses or gains on the sale or disposal of fixed assets (property, plant, and equipment)
- Gains or losses on disposals of investments
- Litigation settlements
GAAP and IFRS also differs in terms of discounting of revenue
Discounting of revenue is another factor in the differences between IFRS vs GAAP income statements. Under GAAP, discounting of revenue is required in limited situations such as in the case of receivables that has more than one-year payment terms, or in situations such as license agreements for TV programs or retail land sales. However, under IFRS discounting of revenue to PV (present value) is required where the inflow of cash or cash equivalent is deferred. This may result in lower revenue because the time value part of the actual receivable is recognized as interest or finance income.
Difference in terms of software revenue recognition
There is also a difference between IFRS and GAAP when it comes to software revenue recognition. Under the GAAP guidance, vendor-specific objective evidence (VSOE) of fair value should be used to find out the estimated selling price of software whereas, under IFRS guidelines, no such rules are present.
Presentation of expenses by function or nature
The presentation of expenses by function or nature is another factor difference between IFRS vs GAAP income statements. The US GAAP has no requirement for expenses to be classified according to their function or nature, rather expense classification requirements are prescribed by SEC regulations. This is different for IFRS; under this standard, the presentation of expenses is done either by function or nature. This determination, however, should be based on which approach is most relevant and reliable and usually depends on the company; that is the industry in which the company operates and its users’ needs.
Expenses under IFRS can be presented on the income statement by function, for example, cost of sales, selling, or administrative activities. Under this method, companies present the cost of sales separately from other expenses. The presentation of expenses by nature, on the other hand, is less complex. For instance, expenses may be disaggregated as personnel costs, purchases of materials, transport costs, depreciation and amortization, and advertising costs.
Under IFRS, a mixed presentation of expenses on the income statement is not permitted. This means that it’s not possible for instance, to present amortization and depreciation in separate line items in a presentation by function. However, regardless of the approach used, companies need to make sure the presentation is not misleading and is relevant to the understanding of the financial statements. Conclusively, companies when presenting expenses by function are expected to include additional information on the nature of expenses in the notes to the financial statements.
US GAAP vs IFRS in terms of Expense Recognition- Gains and Losses
The recognition of gains and losses is also a factor when comparing IFRS vs GAAP income statement presentations. The GAAP guidelines allow companies to either record expenses related to gains and losses in a period incurred within the statement of operations (income statement) or defer those gains or losses using the corridor approach. As for IFRS, the re-measurement of gains and losses is immediately recognized in OCI (other comprehensive income) because there is no way they can be recognized in profit or loss since the corridor and spreading approach is prohibited under IFRS.
Prior-service cost in employee benefit plan
In GAAP, the prior service cost is recognized at the date when the amendment of the plan is adopted under other comprehensive income (OCI), and it is then amortized as income over the remaining years of services of participants to complete the eligibility date or life expectancy.
However, in IFRS, all prior service cost, whether it is positive or negative, is recognized in the profit and loss (P&L) account when the amendment takes place in the employee benefit plan, and it is prohibited to be spread over a future service period, as it may give rise to volatility in P&L.
Presenting additional line items, headings, and subtotals
Presenting additional line items, headings, and subtotals in the income statement differs under IFRS vs GAAP. The IAS 1 allows companies to use additional line items, headings, and subtotals in the income statement whereas GAAP does not present a requirement for that. IFRS permits the use of additional line items, headings, and subtotals if the presentation is relevant to an understanding of the company’s financial performance.
The IFRS allows for judgment when determining what to present and how to present it, rather than prescribing a format or specifying all the possible items. Even though the IFRS does not define gross profit, operating results, or many other common subtotals, there’s flexibility under this standard when adding and defining new line items in the income statement.
Hence, many companies disclose operating profit or results from operating activities as a subtotal before profit or loss in the income statement. As a general rule, all additional line items and subtotals must be clearly labeled, presented, and made up of items recognized and measured using IFRS; and also calculated consistently across periods. Furthermore, items shouldn’t be displayed with more prominence than the other items required in the income statement.
Under IFRS, the development cost is purely treated as an expense in the income statement. Conversely, under GAAP, the development cost is treated as an expense but is still capitalized if certain conditions are satisfied.
Unusual or exceptional items
Describing events or items on the income statement as ‘unusual or exceptional’ is one difference between the IFRS vs GAAP requirements for income statement presentation. Unusual items can include discontinued operations, lawsuits, damage from natural disasters, and restructuring costs. IFRS does not describe events or items of income or expense as exceptional or unusual. It is only possible to characterize items as unusual or exceptional under specific conditions.
However, this should not be frequent and should be reserved for items (e.g natural disasters) that justify a prominence greater than that achieved by separate presentation and disclosure. Such items should also be classified by nature or function, in the same way as the usual or non-exceptional amounts. Also, companies should provide an explanation of the nature of the amount and why the item has been classified as unusual or exceptional. Therefore, under IFRS, companies are, expected to exercise caution when presenting items of income or expense as unusual or exceptional.
However, in GAAP, unlike IFRS, transactions of an unusual nature are defined as possessing a high degree of abnormality. A type of item that is clearly unrelated to, or only incidentally related to, the normal and usual activities of the company can be defined as unusual. Under GAAP, unusual or infrequent transactions are presented in the income statement or disclosed in the notes.
Non-GAAP financial measures
Non-GAAP financial measures (NGFMs) are sometimes referred to outside the United States as alternative performance measures. In practice, companies under the IFRS are increasingly presenting, and investors are increasingly looking to NGFMs. NGFMs are generally achieved by adding subtotals, such as EBIT or EBITDA, to the income statement. Such financial measures can be helpful in linking a company’s financial statements to explanations of its business performance. However, when NGFMs are presented in the income statement, companies are expected to:
- Identify and define the NGFMs presented and the components included in such measures
- Present the basis of calculation and how such NGFMs reconcile to the IFRS financial statements
- Consistently present such measures over time
Unlike IFRS, the presentation of NGFMs in financial statements by SEC registrants or non-SEC registrants is generally prohibited under GAAP. However, there are exceptions to this rule for Foreign Private Issuers applying IFRS.
Table showing the differences between IFRS vs GAAP income statement
|Factor for comparison||IFRS||GAAP|
|Also known as||Under IFRS, the income statement is also known as the statement of profit or loss||Also known as the statement of operations|
|Format||There is no special format of the income statement that needs to be followed under the IFRS||GAAP dictates a specific format in which an income statement should be prepared, i.e either using a single-step or multiple-step format|
|Discounting of Revenue|
Discounting of revenue to PV (present value) is required under IFRS
|Discounting of revenue is required in limited situations under GAAP.|
|Software revenue recognition||Under IFRS guidelines, no rules for using vendor-specific objective evidence (VSOE) of fair value to find the estimated selling price are present||Under the GAAP guidance, vendor-specific objective evidence (VSOE) of fair value should be used to find out the estimated selling price of the software|
Under IFRS, the development cost is purely treated as an expense
|Under GAAP, the development cost is treated as an expense in the income statement, though it is capitalized if certain conditions are satisfied.|
|Prior-Service Cost in Employee Benefit Plan|
All prior service cost, whether positive or negative, is recognized in the profit and loss (P&L) account and is prohibited to be spread over a future service period
|The prior service cost is recognized under other comprehensive income (OCI), and it is amortized as income over the remaining years of services of participants to complete the eligibility date|
|Expenses related to gains and losses||Under IFRS, the corridor and spreading approach is prohibited, thus re-measurement of gains and losses is immediately recognized in OCI instead of the P & L statement||The GAAP guidelines allow companies to either record expenses related to gains and losses in a period incurred within the income statement or defer those gains or losses using the corridor approach.|
|Additional line items, headings, and subtotals||IFRS allows the use of additional line items, headings, and subtotals in the income statement||GAAP does not present a requirement for this|
|Unusual or exceptional item||IFRS does not describe events or items of income or expense as exceptional or unusual||GAAP describes transactions possessing a high degree of abnormality as unusual|
|NGFMs (Non-GAAP financial measures)||NGFMs can be used in income statements under IFRS||The presentation of NGFMs in financial statements is generally prohibited under GAAP|
IFRS vs GAAP Income Statement Similarities
- One of the major similarities between IFRS vs GAAP income statements is that the two accounting standards both require a presentation of the income statement in financial reports.
- In accordance with the GAAP and IFRS, the presentation of the income statement should be consistent; they both require that the presentation and classification of items in the income statement are retained from one period to the next unless the accounting standards require a change or there is a significant change in the entity’s operation or review of financial statements.
- IFRS and GAAP for revenue recognition on the income statement both focus on revenue being recognized when realized and earned; that is, revenue is not recognized on the income statement until the goods or services have been delivered to the customer or clients regardless of when payment is received.
- GAAP and IFRS both present comparative information in respect of the preceding period for all amounts reported in the income statement of the current period.
- The income statement prepared under IFRS and GAAP both captures most, but not all, revenues, income, and expenses; other items of comprehensive income (OCI) do not flow through the income statement
- One of the similarities between IFRS vs GAAP income statements is that they are reported on an accrual basis; IFRS and GAAP both formulate financial statements on an accrued basis.
- Many items that are reported as unusual or irregular used to be classified as extraordinary items on the income statement, however, both IFRS and GAAP no longer require the classification of extraordinary items; they only require classification as nonrecurring items.
- Under IFRS and GAAP, items of expenses or income of the income statement are not offset unless it is required or permitted by another codification topic or subtopic, or unless the amounts relate to similar transactions or events that are not significant. Nonetheless, offsetting is permitted in fewer circumstances under IFRS than under GAAP.
- Discontinued operations classification on the income statement for items that are held for sale or disposed of is required under GAAP and IFRS.
- Distinguishing operating and unusual items in the income statement is required under GAAP and IFRS.
- Reporting comprehensive income is required for both GAAP and IFRS.