Differences in expense recognition, intangible assets, inventories and leases
International Financial Reporting Standards (IFRS), issued by the IASB, are global standards used in 160+ jurisdictions (e.g., the EU, Australia, Canada). They guide recognition, measurement, presentation, and disclosure of financial statement elements.
US GAAP (issued by the FASB) applies only in the U.S. While both frameworks share core principles, key differences appear across IMA-identified learning outcomes like revenue, leases, impairment, and long-lived assets.
This reviewer highlights IMA-tested differences to help you analyze comparative financial statements efficiently.
Expense recognition
US GAAP and IFRS differ in several areas of expense recognition, including share-based payments and employee benefits, covered below.
Share-based payments
The relevant differences between US GAAP and IFRS related to share-based payments are as follows:
| Subtopic | US GAAP | IFRS |
| Equity-settled awards to non-employees | Public companies measure these awards based on the fair value of the equity instruments on the grant date.
Non-public companies use practical expedients for measurement. |
These awards are measured at the fair value of the goods or services received on the date they are received. |
| Remeasurement of liability in liability-classified share-based payment rewards | Changes in the liability’s fair value are recognized as compensation cost each period; if that cost is attributable to producing another asset (e.g., inventory or PP&E), it can be capitalized under the applicable asset guidance rather than expensed immediately. | Changes in the liability’s fair value are recognized in profit or loss and cannot be capitalized. |
| Choice of settlement by employee | Awards where the employee can choose between equity or cash settlement are generally classified as liabilities. | These awards are treated as compound instruments with separate accounting for the equity and liability components. |
Employee benefits
The relevant differences between US GAAP and IFRS related to employee benefits are as follows:
| Subtopic | US GAAP | IFRS |
| Short-term employee benefits | There are no specific rules for short-term employee benefits other than compensated absences. However, companies generally use accrual accounting for these benefits. | These benefits are defined by IFRS and must be accounted for using accrual accounting. |
| Post-employment benefits | Post-employment benefits are divided into “post-retirement benefits” and “other post-employment benefits,” each with its own accounting treatment. | There is no difference in the accounting treatment for post-employment benefits provided before or during retirement. |
| Types of post-employment benefits | Post-retirement benefits are classified the same as IFRS but there are no subclassifications for other post-employment benefits. | Post-employment benefit plans are classified as either defined contribution plans or defined benefit plans. |
| Asset ceiling | The recognition of an asset in respect of a defined benefit plan is not restricted. | If the defined benefit plan is in surplus, then the amount of any net asset recognized is limited to the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan (the ‘asset ceiling’) |
| Curtailments and other plan amendments | Gains from curtailments are recognized when they occur, while losses are recognized when they are probable. | Gains and losses are recognized at the same time as any related restructuring or termination benefits, if these occur before the curtailment or plan amendment. |
Intangible assets
The relevant differences between US GAAP and IFRS related to intangible assets are as follows:
| Subtopic | US GAAP | IFRS |
| Development costs | Generally expensed as incurred, with the exception of certain computer software development costs. | Capitalized if specific criteria are met (e.g., technical feasibility, intention to complete, ability to use or sell the asset). |
| Revaluation | Revaluation is prohibited.
Intangible assets are generally reported at cost less amortization and impairment. |
Allowed only for certain intangible assets if there is an active market for the asset. Revalued assets are reported at fair value. |
The most exam-relevant difference is development costs, and it flows straight through to reported results: capitalizing a cost under IFRS raises assets and current-period income (since the cost isn’t expensed), while amortizing that capitalized asset lowers income in later periods. A company expensing the same cost under US GAAP takes the full hit to income immediately, then reports no further amortization on it.
Example: Development costs under both frameworks
A company incurs $500,000 of costs meeting IFRS’s development-cost capitalization criteria (technical feasibility, and intent and ability to complete and use the asset). The resulting intangible asset is amortized over 5 years.
- US GAAP: the full $500,000 is expensed in the current year, reducing current-year income by $500,000.
- IFRS: the $500,000 is capitalized as an intangible asset and amortized at $100,000 per year. Current-year income falls by only $100,000, assets are $400,000 higher than under US GAAP, and each future year reports an additional $100,000 of amortization expense.
Answer: IFRS capitalization defers the expense, so IFRS income is higher now and lower in later years compared to US GAAP, which expenses the cost immediately.
IFRS also permits revaluation of certain intangible assets to fair value when an active market exists; US GAAP prohibits revaluation, so intangible assets are reported at cost less amortization and impairment.
Inventories
The relevant differences between US GAAP and IFRS related to inventories are as follows:
| Subtopic | US GAAP | IFRS |
| Costing methods | Allows LIFO (Last-In, First-Out), FIFO (First-In, First-Out), weighted-average, and specific identification. | Prohibits LIFO. Allows FIFO, weighted-average, and specific identification. |
| Valuation | Lower of cost or market (LCM) for LIFO and the retail method.
Lower of cost or net realizable value (LCNRV) for FIFO, weighted-average, and specific identification. |
Values inventory at the lower of cost or net realizable value (NRV). NRV is the estimated selling price less estimated costs to complete and sell. |
| Write-down | Write-downs are recognized when market (LCM methods) or NRV (LCNRV methods) falls below cost. Reversals of write-downs are prohibited. | Write-downs are recognized when NRV falls below cost. Reversals of the original write-downs are allowed if the reasons for the write-down no longer exist. |
The most exam-relevant difference is that IFRS prohibits LIFO (US GAAP allows it). When prices are rising, a US GAAP company using LIFO reports higher cost of goods sold, so it shows lower gross income, a lower inventory balance, and a lower current ratio than an otherwise identical IFRS (FIFO) peer. IFRS’s allowance for write-down reversals adds a second effect: if the market recovers, an IFRS company can reverse a prior write-down as a reduction of that period’s cost of sales, raising income in the recovery period, while a US GAAP company carries the written-down cost forward with no reversal.
Example: Inventory write-down reversal
A company writes down inventory from $80,000 cost to $60,000 net realizable value, recording a $20,000 loss. The following year, the item’s value recovers to $75,000.
- US GAAP: the $20,000 write-down loss was already recognized and cannot be reversed. The inventory stays on the books at $60,000.
- IFRS: the write-down is reversed, limited to the amount originally written down, and the reversal reduces the period’s inventory expense (cost of sales). The company reverses $15,000 of the write-down, bringing inventory back up to $75,000.
Answer: The IFRS company reports $15,000 of additional income in the recovery year; the US GAAP company reports none.
Leases
The relevant differences between US GAAP and IFRS related to leases (lessee accounting) are as follows:
| Subtopic | US GAAP | IFRS |
| Lease classification | Lessee accounting uses a dual model of classifying leases as either operating leases and finance leases.
A lease is a finance lease if it meets any one of five criteria: ownership transfers, a purchase option the lessee is reasonably certain to exercise, the lease term is a major part of the asset’s economic life, the present value of payments is substantially all of the asset’s fair value, or the asset is so specialized it has no alternative use to the lessor at the end of the term. Otherwise, it’s an operating lease. |
Uses a single model for lessees.
All leases are treated similarly to finance leases under US GAAP, with a right-of-use (ROU) asset and a lease liability recognized on the balance sheet. |
| Operating leases | ROU asset and lease liability are recognized on the balance sheet. Lease expense is recognized as a single lease cost, generally on a straight-line basis over the lease term. | N/A - no operating lease classification for lessees. |
| Finance leases | ROU asset and lease liability are recognized on the balance sheet. Interest expense and amortization expense are recognized separately. | Similar to finance leases under US GAAP, with ROU asset and lease liability recognized. Interest expense and amortization expense are recognized separately. |
| Leases of low-value assets | No specific exemption for low-value assets. | Lessees can elect not to recognize ROU assets and lease liabilities for leases of low-value assets (e.g., tablets, personal computers, small items of office furniture). |
The most exam-relevant difference is the classification model: US GAAP uses a dual model (operating and finance leases) for lessees, while IFRS uses a single model that treats all leases like finance leases. Both frameworks put the ROU asset and lease liability on the balance sheet for nearly all leases over 12 months; the real difference shows up on the income statement. A US GAAP operating lease reports one straight-line lease cost, while an IFRS lease (and a US GAAP finance lease) reports separate depreciation and interest expense, so total expense is higher in the early years of the lease term and EBITDA is higher than under a US GAAP operating lease. IFRS also offers a low-value asset exemption that US GAAP doesn’t provide, which can keep some leases off the IFRS balance sheet entirely.
We cover differences in long-lived assets and impairment - including the revaluation model, component depreciation, borrowing-cost capitalization, and the one-step versus two-step impairment test - later in this topic, in the chapter Differences in long-lived assets and impairment.