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1.2.12.2 Differences in expense recognition, intangible assets, inventories and leases
Achievable CMA Part 1
1. External financial reporting decisions
1.2. Financial transactions
1.2.12. US GAAP versus IFRS
Our CMA Part 1 course is currently in development and is a work-in-progress.

Differences in expense recognition, intangible assets, inventories and leases

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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.

Exam pitfall: The CMA exam tests US GAAP as the default framework. When a question doesn’t specify IFRS, assume US GAAP rules apply - for example, LIFO is allowed, inventory write-down reversals are prohibited, and development costs are generally expensed. Apply the IFRS-specific rule only when the question explicitly says “under IFRS.”

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.

IFRS vs. US GAAP Overview

  • IFRS (IASB) used in 160+ jurisdictions; US GAAP (FASB) applies only in the U.S.
  • CMA exam defaults to US GAAP unless question explicitly states “under IFRS”
  • Key default US GAAP rules: LIFO allowed, no inventory write-down reversals, development costs generally expensed

Share-Based Payments & Employee Benefits

  • Non-employee equity awards: US GAAP measures at grant-date fair value of equity; IFRS measures at fair value of goods/services received
  • Liability-classified awards: US GAAP allows capitalizing remeasurement cost (e.g., into inventory/PP&E); IFRS requires expensing through profit or loss
  • Employee choice of settlement: US GAAP treats as liability; IFRS splits into compound instrument (equity + liability components)
  • Post-employment benefits: US GAAP separates post-retirement vs. other post-employment benefits; IFRS treats all post-employment benefits uniformly, classified as defined contribution or defined benefit plans
  • IFRS applies an “asset ceiling” limiting recognized net asset in overfunded defined benefit plans; US GAAP has no such restriction

Intangible Assets

  • Development costs: US GAAP expenses as incurred (except software); IFRS capitalizes if criteria met (technical feasibility, intent/ability to complete and use)
    • Effect: IFRS capitalization raises current income and assets, shifts expense to later periods via amortization; US GAAP takes full hit immediately
  • Revaluation: prohibited under US GAAP (cost less amortization/impairment); IFRS allows revaluation to fair value if active market exists

Inventories

  • Costing methods: US GAAP allows LIFO, FIFO, weighted-average, specific ID; IFRS prohibits LIFO (allows FIFO, weighted-average, specific ID)
    • Rising prices: US GAAP LIFO users report higher COGS, lower income, lower inventory/current ratio vs. IFRS peers
  • Valuation: US GAAP uses LCM (LIFO/retail) or LCNRV (other methods); IFRS uses lower of cost or NRV
  • Write-down reversals: prohibited under US GAAP; allowed under IFRS if conditions causing write-down reverse, boosting income in recovery period

Leases (Lessee Accounting)

  • US GAAP: dual model — operating leases (single straight-line lease cost) vs. finance leases (separate interest/amortization)
    • Finance lease triggers: ownership transfer, bargain purchase option, major part of economic life, PV ≈ fair value, or specialized asset
  • IFRS: single model — all leases treated like finance leases (ROU asset + lease liability, separate interest/depreciation expense)
  • Both frameworks recognize ROU asset/lease liability for most leases >12 months, but expense pattern differs (US GAAP operating lease = single straight-line cost vs. higher early-year expense/EBITDA under IFRS or US GAAP finance lease)
  • IFRS offers low-value asset exemption (no ROU/liability recognition); US GAAP has no such exemption

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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.

Exam pitfall: The CMA exam tests US GAAP as the default framework. When a question doesn’t specify IFRS, assume US GAAP rules apply - for example, LIFO is allowed, inventory write-down reversals are prohibited, and development costs are generally expensed. Apply the IFRS-specific rule only when the question explicitly says “under IFRS.”

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.

Key points

IFRS vs. US GAAP Overview

  • IFRS (IASB) used in 160+ jurisdictions; US GAAP (FASB) applies only in the U.S.
  • CMA exam defaults to US GAAP unless question explicitly states “under IFRS”
  • Key default US GAAP rules: LIFO allowed, no inventory write-down reversals, development costs generally expensed

Share-Based Payments & Employee Benefits

  • Non-employee equity awards: US GAAP measures at grant-date fair value of equity; IFRS measures at fair value of goods/services received
  • Liability-classified awards: US GAAP allows capitalizing remeasurement cost (e.g., into inventory/PP&E); IFRS requires expensing through profit or loss
  • Employee choice of settlement: US GAAP treats as liability; IFRS splits into compound instrument (equity + liability components)
  • Post-employment benefits: US GAAP separates post-retirement vs. other post-employment benefits; IFRS treats all post-employment benefits uniformly, classified as defined contribution or defined benefit plans
  • IFRS applies an “asset ceiling” limiting recognized net asset in overfunded defined benefit plans; US GAAP has no such restriction

Intangible Assets

  • Development costs: US GAAP expenses as incurred (except software); IFRS capitalizes if criteria met (technical feasibility, intent/ability to complete and use)
    • Effect: IFRS capitalization raises current income and assets, shifts expense to later periods via amortization; US GAAP takes full hit immediately
  • Revaluation: prohibited under US GAAP (cost less amortization/impairment); IFRS allows revaluation to fair value if active market exists

Inventories

  • Costing methods: US GAAP allows LIFO, FIFO, weighted-average, specific ID; IFRS prohibits LIFO (allows FIFO, weighted-average, specific ID)
    • Rising prices: US GAAP LIFO users report higher COGS, lower income, lower inventory/current ratio vs. IFRS peers
  • Valuation: US GAAP uses LCM (LIFO/retail) or LCNRV (other methods); IFRS uses lower of cost or NRV
  • Write-down reversals: prohibited under US GAAP; allowed under IFRS if conditions causing write-down reverse, boosting income in recovery period

Leases (Lessee Accounting)

  • US GAAP: dual model — operating leases (single straight-line lease cost) vs. finance leases (separate interest/amortization)
    • Finance lease triggers: ownership transfer, bargain purchase option, major part of economic life, PV ≈ fair value, or specialized asset
  • IFRS: single model — all leases treated like finance leases (ROU asset + lease liability, separate interest/depreciation expense)
  • Both frameworks recognize ROU asset/lease liability for most leases >12 months, but expense pattern differs (US GAAP operating lease = single straight-line cost vs. higher early-year expense/EBITDA under IFRS or US GAAP finance lease)
  • IFRS offers low-value asset exemption (no ROU/liability recognition); US GAAP has no such exemption

More from US GAAP versus IFRS

  • Learning outcomes
  • Differences in long-lived assets and impairment