For more than 20 years, the practice of evaluating assets and liabilities at approximations of their current value, also known as fair value accounting, has been on the rise. Both generally accepted accounting principles, or GAAP, in the U.S. and international financial reporting standards, of IFRS, practiced by nearly 100 countries across the globe, persist in using fair value accounting methods. Small businesses that do business overseas must understand the difference between fair value accounting practices in GAAP and the same practices in IFRS.
Similarities in Rules
-
Both GAAP and IFRS share some similarities in how they assess fair value for assets and liabilities. Each system defines fair value as the price the seller would receive to sell an asset or pay to remove a liability in a typical transaction. Both systems use the income approach to convert future amounts to the present discounted amount, and both use the cost approach to assess the current replacement value of an asset. These similarities make it easier for small businesses to adapt from one set of standards to the other.
Differences in Rules
-
Although the two systems share definitions and processes, they can differ in how these rules are applied to various assets and liabilities. Some assets are eligible for fair value accounting under GAAP but not under IFRS, and vice versa. Each system also has different requirements for measuring the fair value of investments in a business whose purpose is to make investments on behalf of clients for capital appreciation, investment income or both. Small-business owners must be aware of the rules regarding which assets apply under which set of standards
Differences in Guidance
-
A major difference in how IFRS and GAAP handle fair value accounting lies in the level of guidance and specificity each set of standards provides for evaluating assets. GAAP contains specific guidance on fair value measurement, including general valuation guidance and fair value hierarchy. IFRS has limited guidance for determining fair values and no detailed guidance for valuation methods. Small-business owners must be aware of the methods they use in determining fair value for their assets and how those methods comply with each set of standards.
Differences in "Push-Down" Accounting
-
Push-down accounting, in which fair value adjustments are shown in the financial statements of the target firm in an acquisition, is not a permitted practice under IFRS rules. In the U.S., Securities and Exchange Commission regulations require that companies registered with the agency use push-down accounting to show the fair value adjustments made as a result of an acquisition. Firms that are not SEC registrants are also permitted to use push-down accounting to show fair value adjustments under GAAP.
