IFRS vs US GAAP on the Financial Statements (21:57)
You’ll learn the key differences between US GAAP and IFRS on the 3 main financial statements (Income Statement, Balance Sheet, and Cash Flow Statement).
You’ll also learn how to adjust an international company’s financial statements to make it easier to model and project over time.
Table of Contents:
1:46 – Why US GAAP vs. IFRS Matters
5:28 – Income Statement Terminology Differences
7:34 – Balance Sheet Differences
14:09 – How to Adjust the Financial Statements for an IFRS Company
20:02 – Recap and Summary
The Income Statement is very similar regardless of the accounting system.
Some items have different names (e.g., Revenue is often called Turnover and Net Income is often called Profit), but that’s about it.
There are more differences on the Balance Sheet – items are often arranged in a different order (sometimes Long-Term Assets are listed first, then Current Assets, then Equity, then Long-Term Liabilities and Current Liabilities at the end).
The Balance Sheet itself is usually called the “Statement of Financial Position.”
Also, items within the Equity section often have different names:
Common Stock is called “Share Capital” or “Issued Capital.”
Additional Paid-In Capital is often called the “Share Premium.”
Retained Earnings and Treasury Stock tend to have similar names.
IFRS-based companies also have many “Reserve” categories for items such as FX translation differences and unrealized gains and losses.
For US-based companies, these items show up within Accumulated Other Comprehensive Income (AOIC) rather than being split out into separate “Reserve” categories.
But the FUNCTIONALITY of the Balance Sheet is still very similar (items still flow in and change the same way), even if items have different names or are grouped differently.
Cash Flow Statement
There are more differences on the Cash Flow Statement, because most US-based companies use the INDIRECT method and most international companies use the DIRECT method.
The Indirect Method starts with Net Income, makes non-cash adjustments, and lists the changes in Working Capital in the Cash Flow from Operations section.
The Direct Method simply lists the cash received from customers and cash paid to suppliers and employees, along with income taxes and interest and other expenses, and so you don’t see the full details behind the non-cash adjustments and working capital spending.
When this happens, it is much, much harder to link the financial statements because changes in items such as Accounts Receivable and Accounts Payable won’t flow into anything on the Cash Flow Statement.
So we recommend ADJUSTING the financial statements as follows:
First, find a reconciliation between this Cash Flow Statement and the company’s operating income and/or net income.
Then, make the Cash Flow Statement start with Net Income instead, as it normally does, and include all the line items from this reconciliation (non-cash adjustments, Working Capital changes, etc.).
And if there are still remaining differences between items such as income taxes and interest expense on the Income Statement vs. Cash Flow Statement, make adjusting entries on the CFS that indicate the true cash amount that a company paid for those.