US GAAP vs IFRS Differences

Why A? And why not the others?

Correct answer: A. Last-in, first-out (LIFO), which IAS 2 prohibits while ASC 330 permits it

IAS 2 explicitly prohibits the use of last-in, first-out as a cost formula for inventory, while ASC 330 in US GAAP continues to permit it, making this the correct choice and the clearest cost-flow difference between the two frameworks. The option describing first-in, first-out is wrong because IAS 2 and ASC 330 both permit it as an acceptable cost formula, so it is not a point of divergence. The option describing weighted-average cost is wrong for the same reason: both frameworks accept it as one of the standard cost formulas for interchangeable inventory. The option describing specific identification is wrong because both frameworks require or permit it for inventory items that are not ordinarily interchangeable, or that are produced and segregated for specific projects, so there is no restriction unique to either framework there. The LIFO prohibition under IFRS is a long-standing, deliberate divergence rather than an oversight, and it is one of the most frequently tested US GAAP vs IFRS inventory differences precisely because it can create materially different cost of goods sold and ending inventory figures during periods of changing prices.

Source: IFRS Foundation, IAS 2 Inventories (cost formulas, prohibiting LIFO); FASB Accounting Standards Codification ASC 330 Inventory (permitting LIFO)

Why B? And why not the others?

Correct answer: B. IAS 2 requires the write-down to be reversed, limited to the amount of the original write-down, while US GAAP prohibits reversing a write-down once recognized

IAS 2 requires a previously recognized inventory write-down to be reversed when the circumstances that caused it no longer exist or when net realizable value has clearly increased, but the reversal is capped at the amount of the original write-down so the new carrying amount never exceeds the item's original cost. US GAAP inventory guidance, once a write-down establishes a new, lower cost basis, does not permit that basis to be written back up even if the item's market value later recovers. The option claiming neither framework allows any adjustment is wrong because IAS 2 explicitly mandates a capped reversal in these circumstances. The option reversing the frameworks' positions is wrong because it attributes the mandatory-reversal treatment to US GAAP and the no-reversal treatment to IAS 2, which is the opposite of each standard's actual rule. The option allowing an uncapped reversal under both frameworks is wrong because IAS 2's reversal is explicitly limited to the original write-down amount, and US GAAP does not permit any reversal at all, capped or otherwise.

Source: IFRS Foundation, IAS 2 Inventories, paragraphs 33-34 (reversal of write-down); FASB Accounting Standards Codification ASC 330-10-35 (subsequent measurement of inventory, no write-up after write-down)

Why C? And why not the others?

Correct answer: C. IAS 38 requires these costs to be capitalized once all specified criteria are demonstrated, while ASC 730 generally requires research and development costs to be expensed as incurred

IAS 38 sets out six specific criteria an entity must demonstrate before development expenditure can be recognized as an intangible asset: technical feasibility of completing the asset, intention to complete it, ability to use or sell it, how it will generate probable future economic benefits, availability of adequate technical, financial and other resources, and the ability to measure the attributable expenditure reliably. Once all six are demonstrated, capitalization of further development costs is required, not merely permitted. ASC 730, by contrast, generally requires research and development costs to be charged to expense as incurred, reflecting a US GAAP view that the outcome of R&D activity is too uncertain to support asset recognition, aside from narrow exceptions such as certain capitalized software costs outside the scope of ASC 730 itself. The option describing the frameworks in reverse order is wrong because it attributes the expense-as-incurred rule to IAS 38 and the capitalization option to ASC 730, which inverts each standard's actual treatment. The option treating both frameworks as requiring expensing is wrong because it ignores IAS 38's mandatory capitalization once its criteria are met. The option treating both frameworks as requiring capitalization is wrong because ASC 730's default rule for research and development costs is expensing, not capitalization, regardless of technical feasibility.

Source: IFRS Foundation, IAS 38 Intangible Assets, paragraphs 57-58 (development cost recognition criteria); FASB Accounting Standards Codification ASC 730-10-25 Research and Development (costs charged to expense when incurred)

Why D? And why not the others?

Correct answer: D. Under IAS 36, the reversal is required, limited to the depreciated carrying amount the asset would have had absent the original impairment; under US GAAP, ASC 360 prohibits reversing an impairment loss on held-and-used long-lived assets

IAS 36 requires an entity to assess at each reporting date whether indicators suggest a previously recognized impairment loss on an asset (other than goodwill) may have decreased or no longer exists, and if so, to reverse the loss, but the increased carrying amount is capped at what the asset's depreciated carrying amount would have been had no impairment loss been recognized in prior years. ASC 360, governing US GAAP treatment of long-lived assets held and used, takes the opposite position: once an impairment loss is recognized, it establishes a new cost basis, and that basis cannot subsequently be written back up even if the asset's value recovers. The option attributing the reversal-permitted treatment to US GAAP and the no-reversal rule to IFRS is wrong because it swaps the two frameworks' actual positions. The option stating neither framework allows reversal is wrong because IAS 36 explicitly requires it, subject to its stated ceiling, once indicators of decreased impairment are present. The option describing an automatic reversal under both frameworks is wrong because US GAAP's ASC 360 prohibits reversal outright, and even under IAS 36 the reversal is capped rather than unlimited, so it is not simply automatic to the full extent of any recoverable-amount increase.

Source: IFRS Foundation, IAS 36 Impairment of Assets, paragraphs 114-117 (reversal of an impairment loss); FASB Accounting Standards Codification ASC 360-10-35-20 (no subsequent reversal for held-and-used long-lived assets)

Why B? And why not the others?

Correct answer: B. Under ASC 360, no impairment is recognized because the recoverability test using undiscounted cash flows passes; under IAS 36, an impairment is recognized because the discounted recoverable amount is below the carrying amount

ASC 360 uses a two-step impairment model for long-lived assets held and used: first, a recoverability test compares the asset's carrying amount to the sum of undiscounted future cash flows expected from its use and eventual disposal; only if the carrying amount exceeds that undiscounted total does the entity move to step two and measure a loss based on fair value. Because the undiscounted cash flows here exceed the carrying amount, the recoverability test passes and no impairment is recognized under US GAAP, regardless of what a discounted calculation would show. IAS 36 skips any undiscounted screening step entirely and compares the carrying amount directly to the recoverable amount, defined as the higher of fair value less costs of disposal and value in use, where value in use is calculated using discounted cash flows; since both of those figures are below the carrying amount here, an impairment loss is recognized under IFRS. The option reversing which framework reaches which conclusion is wrong because it swaps the actual outcomes. The option finding no impairment under both frameworks ignores that IFRS's test is based on discounted, not undiscounted, cash flows. The option finding an impairment under both frameworks ignores that the US GAAP recoverability screen is passed on an undiscounted basis, which blocks any loss measurement at this stage.

Source: FASB Accounting Standards Codification ASC 360-10-35-17 (recoverability test using undiscounted cash flows); IFRS Foundation, IAS 36 Impairment of Assets, paragraphs 18 and 6 (recoverable amount as the higher of fair value less costs of disposal and value in use)

Why A? And why not the others?

Correct answer: A. IAS 16 permits an entity to elect this revaluation model, applied consistently to an entire class of assets; US GAAP does not permit revaluation and requires the historical cost model

IAS 16 allows an entity to choose, as an accounting policy applied to an entire class of property, plant and equipment, either the cost model or the revaluation model; under the revaluation model the asset is carried at its fair value at the revaluation date less subsequent depreciation and impairment, with increases generally recognized in other comprehensive income and accumulated as revaluation surplus, subject to reversing any previous decrease recognized in profit or loss for that same asset. US GAAP has no equivalent policy choice: property, plant and equipment is measured using the historical cost model, less accumulated depreciation and impairment, and upward revaluation to fair value is not permitted under any circumstances. The option reversing which framework allows revaluation is wrong because it attributes the optional revaluation model to US GAAP and a cost-only requirement to IAS 16, which is the opposite of each standard's actual position. The option claiming neither framework permits revaluation is wrong because IAS 16 explicitly offers it as an accounting policy choice. The option claiming both frameworks mandate revaluation at each reporting date is wrong because even under IAS 16 the revaluation model is elective, not mandatory, and revaluations only need to occur with sufficient regularity to keep carrying amounts from materially differing from fair value.

Source: IFRS Foundation, IAS 16 Property, Plant and Equipment, paragraphs 29-31 (cost model and revaluation model); FASB Accounting Standards Codification ASC 360 Property, Plant, and Equipment (historical cost model, no revaluation)

Why A? And why not the others?

Correct answer: A. Under IAS 16, componentization is required whenever a part is significant in cost and has a differing useful life or depreciation pattern; under US GAAP, the component approach is permitted but not required

IAS 16 requires that each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item be depreciated separately, which in practice means components with materially different useful lives or consumption patterns, such as aircraft engines versus the airframe, must be identified and depreciated on their own schedules. US GAAP does not impose this requirement: the component approach to depreciation is an available method, but entities are not obligated to disaggregate an asset into components, and in practice many US GAAP preparers depreciate the asset as a single unit using a composite or overall useful life. The option describing US GAAP as mandating componentization and IFRS as leaving it to discretion is wrong because it inverts the actual requirement, since IAS 16 imposes a mandatory requirement rather than leaving component depreciation purely to judgment once the significance threshold is met. The option claiming neither framework allows separate depreciation of a part is wrong because IAS 16 explicitly requires it under the stated conditions. The option limiting the requirement to regulated industries like aviation is wrong because IAS 16's componentization rule applies generally to any qualifying asset across any industry, not only to aircraft or similarly regulated equipment.

Source: IFRS Foundation, IAS 16 Property, Plant and Equipment, paragraph 43 (depreciation of significant parts separately); FASB Accounting Standards Codification ASC 360 Property, Plant, and Equipment (component approach permitted, not required)

Why D? And why not the others?

Correct answer: D. IAS 40 permits an entity to elect the fair value model for investment property, with fair value changes recognized in profit or loss; US GAAP has no equivalent standard and generally accounts for such property under the cost-based property, plant and equipment guidance

IAS 40 defines investment property as land or a building held to earn rentals or for capital appreciation rather than for use in production or administration, and it permits an entity to choose the fair value model as its accounting policy for all such investment property, under which fair value changes are recognized directly in profit or loss each period, with no depreciation charged. US GAAP has no separate standard dedicated to investment property; a building leased out to third parties is generally accounted for like any other item of property, plant and equipment under cost-based guidance, measured at depreciated historical cost and tested for impairment, with fair value changes not recognized through profit or loss. The option describing US GAAP as having a dedicated fair-value-mandating standard and IFRS as requiring the cost model is wrong because it reverses which framework actually offers the fair value election, and IAS 40's fair value model is elective rather than restricted to IFRS-only cost treatment. The option claiming neither framework permits fair value accounting here is wrong because IAS 40 explicitly allows it as a policy choice. The option requiring inventory classification is wrong because a building generating rental income and held for the long term does not meet the definition of inventory under either framework.

Source: IFRS Foundation, IAS 40 Investment Property, paragraphs 5 and 33 (definition of investment property; fair value model policy choice); US GAAP has no separate investment property standard, so such property is generally accounted for under FASB Accounting Standards Codification ASC 360 Property, Plant, and Equipment

Why B? And why not the others?

Correct answer: B. IAS 41 requires the herd to be measured at fair value less costs to sell, with changes recognized in profit or loss; US GAAP has no equivalent standard, and such assets are generally carried at historical cost

IAS 41 applies to biological assets such as living animals and plants used in agricultural activity, and it requires them to be measured, both on initial recognition and at each subsequent reporting date, at fair value less estimated costs to sell, with the resulting gain or loss recognized in profit or loss for the period in which it arises, except in the narrow case where fair value cannot be reliably measured on initial recognition. US GAAP has no equivalent comprehensive standard applying a fair value model to biological assets generally; livestock and similar agricultural assets held by most entities are typically carried at historical cost, consistent with the broader US GAAP preference for cost-based measurement, with only limited industry-specific guidance addressing certain agricultural producers. The option requiring fair value under both frameworks is wrong because it overstates US GAAP's treatment, which lacks IAS 41's general fair value mandate. The option swapping the frameworks is wrong because it attributes the dedicated fair-value agriculture standard to US GAAP and a cost-only rule to IFRS, which is the reverse of the actual standards. The option prohibiting recognition of living animals as assets under either framework is wrong because both frameworks recognize such animals as assets when the entity controls them and future economic benefits are expected to flow to the entity; the disagreement is only about how they are subsequently measured.

Source: IFRS Foundation, IAS 41 Agriculture, paragraphs 10-13 (recognition and fair value measurement of biological assets); US GAAP has no directly equivalent comprehensive standard, so agricultural assets are generally measured at historical cost

Why C? And why not the others?

Correct answer: C. Under IAS 37, a provision is recognized because 60 percent exceeds the standard's more-likely-than-not threshold; under ASC 450, the item is generally only disclosed, because US GAAP's probable threshold is commonly applied at a materially higher likelihood than 60 percent

IAS 37 requires a provision to be recognized when an outflow of resources is probable, and the standard defines probable as more likely than not to occur, which is commonly applied as a threshold just above 50 percent; a 60 percent likelihood clearly clears that bar, so a provision is recognized together with a reasonable estimate of the amount. ASC 450 also uses the word probable as its recognition threshold, but in practice that threshold is applied at a materially higher likelihood, often described as roughly 75 to 80 percent or higher, so a 60 percent likelihood, while indicating a real possibility of loss, typically falls into the reasonably possible category that leads to disclosure in the notes rather than recognition of a liability. The option finding recognition under both frameworks is wrong because it assumes the two frameworks apply an identical numeric threshold, when the practical application of the probable threshold differs meaningfully between them. The option finding disclosure only under both frameworks is wrong because it understates IAS 37's lower more-likely-than-not threshold, which 60 percent satisfies. The option reversing the two frameworks' outcomes is wrong because it attributes the lower threshold to US GAAP and the higher threshold to IFRS, which is the opposite of how each standard is actually applied in practice.

Source: IFRS Foundation, IAS 37 Provisions, Contingent Liabilities and Contingent Assets, paragraphs 14 and 23 (probable defined as more likely than not); FASB Accounting Standards Codification ASC 450-20 Loss Contingencies (probable threshold applied at a materially higher likelihood in practice)

Why D? And why not the others?

Correct answer: D. The entity measures LIFO inventory at the lower of cost or market, where market is bounded by a replacement-cost-based ceiling and floor; IAS 2 would instead require lower of cost and net realizable value for that same inventory, with no replacement-cost ceiling or floor

FASB's simplification of inventory guidance moved most US GAAP inventory measured under first-in, first-out or average cost to a lower-of-cost-and-net-realizable-value test, aligning that portion of US GAAP with the approach IAS 2 already applies to all inventory. That simplification explicitly carved out inventory measured using the last-in, first-out method or the retail inventory method, which continue to apply the older lower-of-cost-or-market test, under which market is defined as replacement cost, bounded by a ceiling equal to net realizable value and a floor equal to net realizable value less a normal profit margin. Because IAS 2 does not permit LIFO as a cost-flow assumption at all, an entity using LIFO under US GAAP would, if it reported the same inventory under IFRS, measure it using the ordinary lower-of-cost-and-net-realizable-value approach with no replacement-cost ceiling or floor concept involved. The option describing a fair-value-through-profit-or-loss approach is wrong because neither framework measures inventory at fair value in this way; both use a lower-of-cost-based test. The option claiming the FASB simplification applied without exception to all cost-flow assumptions is wrong because the simplification specifically excluded LIFO and retail-method inventory, leaving the older test in place for them. The option describing an absolute prohibition on writing inventory below cost, and no IAS 2 subsequent-measurement rule at all, is wrong because both frameworks require inventory to be written down when its recoverable value falls below cost.

Source: FASB Accounting Standards Update 2015-11, Simplifying the Measurement of Inventory (lower of cost and net realizable value, excluding LIFO and retail-method inventory); IFRS Foundation, IAS 2 Inventories, paragraphs 9 and 25-27 (lower of cost and net realizable value; LIFO prohibited)