XBRL, Taxonomy, IFRS, and US GAAP

To completely understand XBRL and its importance to businesses in the future, one must first know what it is.  XBRL, technically speaking, “is a digital ‘language’ that was developed specifically to communicate information between businesses and other users of financial information” (IFRS Foundation, 2011), like investors, regulators (like the SEC), and analysts.  XBRL does not change the data being reported, it just offers “a common, electronic format for business reporting” (IFRS Foundation, 2011).  As companies are being required to become more and more transparent and so many companies are in the international market, it is important that there is a place where this data can easily be reported, extracted, to then be analyzed.

 

For XBRL to work correctly, it uses taxonomies.  What are taxonomies?  Well, they are “the computer-readable ‘dictionaries’ of XBRL that provide definitions for XBRL tags, information about the tags, and organize the tags into a meaningful structure” (IFRS Foundation, 2011).  Taxonomies can differ in their uses and in their standards.  The IFRS (International Financial Reporting Standards) has a goal “to develop a single set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated accounting principles”(Ramin & Reiman, 2013).  They have created their own taxonomy, called the IFRS Taxonomy.  The IFRS Foundation creates and publishes XBRL tags for all of the IFRS disclosures.  The IFRS Taxonomy contains and organizes all of these tags.   The ultimate goal of IFRS is to get the world to use a “common language for financial reporting” (IFRS Foundation, 2011) and to use XBRL for “a common format for business and financial reporting” (IFRS Foundation, 2011).

 

In the United States, we are ‘governed’ in the financial world by US GAAP (Generally Accepted Accounting Principles).  The SEC has started requiring all public companies to begin reporting using XBRL, rules issued January 30, 2009.  The question is now, what taxonomy do we use so that the ‘meaning’ of the data is consistent?  Next we will review the IFRS and US GAAP, similarities and differences.

 

The concepts of IFRS and US GAAP are more similar than they are different; however, the differences are significant and could have substantial financial repercussions on US businesses.  To completely understand the two standards, let’s look at a few of the main areas of concern for US businesses to see their similarities and differences:  financial statement presentation, inventory, intangible assets, and leases.

 

Financial Statement Presentation

Both standards are similar in the sense that financial statements include a balance sheet, income statement, statement of cash flows, and notes to the financial statements.  Both of the standards require that the financial statements use accrual basis accounting with rare exceptions, like with the statement of cash flow.  Finally, both standards are similar with regards to materiality and consistency that must be considered when preparing financial statements.

According to US GAAP versus IFRS: The basics by Ernst & Young, the two standards differ with regards to financial statement presentation in the following ways:

 

Topic	US GAAP	IFRS
Financial periods required	Generally, comparative financial statements are presented; however, a single year may be presented in certain circumstances.  Public companies must follow SEC rules, which typically require balance sheets for the two most recent years, while all other statements must cover the three-year period ended on the balance sheet date.	Comparative information must be disclosed with respect to the previous period for all amounts reported in the financial statements.
Layout of balance sheet and income statement	No general requirement within US GAAP to prepare the balance sheet and income statement in accordance with a specific layout; however, public companies must follow the detailed requirements in Regulation S-X.	IAS 1, Presentation of Financial Statements, does not prescribe a standard layout, but includes a list of minimum items. These minimum items are less prescriptive than the requirements in Regulation S-X.
Presentation of debt as current versus non-current in the balance sheet	Debt for which there has been a covenant violation may be presented as non-current if a lender agreement to waive the right to demand repayment for more than one year exists prior to the issuance of the financial statements.	Debt associated with a covenant violation must be presented as current unless the lender agreement was reached prior to the balance sheet date.
Income statement - classification of expenses	SEC registrants are required to present expenses based on function (e.g., cost of sales, administrative).	Entities may present expenses based on either function or nature (e.g., salaries, depreciation). However, if function is selected, certain disclosures about the nature of expenses must be included in the notes.

 

Inventory

Both standards agree that the primary basis of accounting for inventory is cost.  Both use the definition of inventory as the “assets held for sale in the ordinary course of business, in the process of production for such sale or to be consumed in the production of goods or services” (Ernst & Young, 2011).  The significant differences between the two standards, according to US GAAP versus IFRS: The basics by Ernst & Young, are outlined below:

Topic	US GAAP	IFRS
Costing methods	LIFO is an acceptable method. Consistent cost formula for all inventories in nature is not explicitly required.	LIFO is prohibited. Same cost formula must be applied to all inventories similar in nature or use to the entity.
Measurement	Inventory is carried at the lower of cost or market. Market is defined as current replacement cost, but not greater than net realizable value (estimated selling price less reasonable costs of completion and sale) and not less than net realizable value reduced by a normal sales margin.	Inventory is carried at the lower cost or net realizable value. Net realizable value is defined as the best estimate of the net amount inventories are expected to realize.
Reversal of inventory write-downs	Any write-down of inventory to the lower of cost or market creates a new cost basis that subsequently cannot be reversed.	Previously recognized impairment losses are reversed up to the amount of the original impairment loss when the reasons for the impairment no longer exist.
Permanent inventory markdowns under the retail inventory method (RIM)	Permanent markdowns do not affect the gross margins used in applying the RIM. Rather, such markdowns reduce the carrying cost of inventory to net realizable value, less an allowance for an approximately normal profit margin, which may be less than both original cost and net realizable value.	Permanent markdowns affect the average gross margin used in applying the RIM. Reduction of the carrying cost of inventory to below the lower of cost or net realizable value is not allowed.

 

Intangible Assets

Both standards define intangible assets as “nonmonetary assets without physical substance” (Ernst & Young, 2011).  Both standards require that the recognition criteria be probable future economic benefits and cost that can be reliably measured.  Both state that internally developed intangibles are not recognized as assets.  Both standards require that “internal costs related to the research phase of research and development are expensed as incurred” (Ernst & Young, 2011).  The major differences with regards to intangible assets are listed here, as defined by US GAAP versus IFRS: The basics by Ernst & Young:

Topic	US GAAP	IFRS
Development costs	Development costs are expensed as incurred unless addressed by guidance in another ASC Topic. Development costs related to computer software developed for external use are capitalized once technological feasibility is established in accordance with specific criteria (ASC 985-20). In the case of software developed for internal use, only those costs incurred during the application development stage (as defined in ASC 350-40, Intangibles — Goodwill and Other — Internal-Use Software) may be capitalized.	Development costs are capitalized when technical and economic feasibility of a project can be demonstrated in accordance with specific criteria, including: demonstrating technical feasibility, intent to complete the asset, and ability to sell the asset in the future. Although application of these principles may be largely consistent with ASC 985-20 and ASC 350-40, there is no separate guidance addressing computer software development costs.
Advertising costs	Advertising and promotional costs are either expensed as incurred or expensed when the advertising takes place for the first time (policy choice). Direct response advertising may be capitalized if the specific criteria in ASC 340-20, Other Assets and Deferred Costs — Capitalized Advertising Costs, are met.	Advertising and promotional costs are expensed as incurred. A prepayment may be recognized as an asset only when payment for the goods or services is made in advance of the entity having access to the goods or receiving the services.
Revaluation	Revaluation is not permitted.	Revaluation to fair value of intangible assets other than goodwill is a permitted accounting policy election for a class of intangible assets. Because revaluation requires reference to an active market for the specific type of intangible, this is relatively uncommon in practice.

 

Leases

Overall, the accounting for leases requirements for both US GAAP and IFRS is similar; however, US GAAP guidance is more specific in application.  According to Ernst & Young, “both focus on classifying leases as either capital or operating, and both separately discuss lessee and lessor accounting” (Ernst & Young, 2011).  There are three major areas of difference between US GAAP and IFRS that pertain to the lease of real estate and recognition of gain/loss on a sale and leaseback when leaseback is either an operating or capital leaseback.  The table below details these differences, as defined by US GAAP versus IFRS: The basics by Ernst & Young:

Topic	US GAAP	IFRS
Lease of real estate	A lease of land and buildings that transfers ownership to the lessee or contains a bargain purchase option would be classified as a capital lease by the lessee, regardless of the relative value of the land. If the fair value of the land at inception represents less than 25% of the total fair value of the lease, the lessee accounts for the land and building components as a single unit for purposes of evaluating the 75% and 90% tests noted above. Otherwise, the lessee must consider the land and building components separately for purposes of evaluating other lease classification criteria. (Note: Only the building is subject to the 75% and 90% tests in this case.)	The land and building elements of the lease are considered separately when evaluating all indicators unless the amount that would initially be recognized for the land element is immaterial, in which case they would be treated as a single unit for purposes of lease classification. There is no 25% test to determine whether to consider the land and building separately when evaluating certain indicators.
Recognition of a gain or loss on a sale and leaseback when the leaseback is an operating leaseback	If the seller does not relinquish more than a minor part of the right to use the asset, gain or loss is generally deferred and amortized over the lease term. If the seller relinquishes more than a minor part of the use of the asset, then part or all of a gain may be recognized depending on the amount relinquished. (Note: Does not apply if real estate is involved, as the specialized rules are very restrictive with respect to the seller’s continuing involvement, and they may not allow for recognition of the sale.)	Gain or loss is recognized immediately, subject to adjustment if the sales price differs from fair value.
Recognition of a gain or loss on a sale-leaseback when the leaseback is a capital leaseback	Generally, same as above for operating leaseback in which the seller does not relinquish more than a minor part of the right to use the asset.	Gain or loss deferred and amortized over the lease term.

 

These are just some of the similarities and differences between IFRS and US GAAP.  While the US has made strives to comply with IFRS standards, we still have a long way to go.  One big difference between US GAAP and IFRS that will always be present is that US GAAP is rule-based while IFRS is principle based, which leads to open interpretation in IFRS.  One of the major complaints by US companies is that the expense to change their processes will be so great at a time when we are just starting to recover from the recessionary times.  Many companies are torn on their feelings of whether going to IFRS will make a difference or not for them.  While many investors look forward to being able to compare companies world-wide on a level playing ground.

 

 

References and Works Cited

 

Epstein, B. (2012). IFRS versus GAAP. Retrieved from http://www.ifrsaccounting.com/ifrs-gaap.html

Ernst & Young. (2011, December). US GAAP versus IFRS. Retrieved from http://www.ey.com/Publication/vwLUAssets/US_GAAP_v_IFRS:_The_Basics/$FILE/US%20GAAP%20v%20IFRS%20Dec%202011.pdf

 

Forgeas, R. (2008, June 16). Is IFRS that different from US GAAP? Retrieved from http://www.ifrs.com/overview/General/differences.html

 

Hynek, A. (2011, November 28). What a switch from GAAP to IFRS may mean for investors. Retrieved from http://www.foxbusiness.com/personal-finance/2011/11/28/what-switch-from-gaap-to-ifrs-may-mean-for-investors/

 

IFRS Foundation. (2011, March). Snapshot: The IFRS Taxonomy. Retrieved from www.ifrs.org/xbrl

 

International Accounting Standards Board. (2009). IFRS for SME: Illustrative Financial Statements and Presentation and Disclosure Checklist. London: IASCF

 

Kaiser, J., Kuykendall, K., & Davis, T. (2012, October). IFRS and US GAAP: similarities and differences. Retrieved from http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaap-similarities-and-differences.jhtml

 

Ramin, K. & Reiman, C. (2013). IFRS and XBRL: How to improve Business Reporting through Technology and Object Tracking. John Wiley & Sons, Ltd.

 

U.S. Securities and Exchange Commission. (2010, January 08). Interactive Data and Financial Statements. Retrieved from http://www.sec.gov/spotlight/xbrl/financial-statements.shtml