15 6 Income statement and statement of comprehensive income

The most commonly used accounting standards are International Financial Reporting Standards or IFRS and Generally Accepted Accounting Principles or GAAP. GAAP stands for generally accepted accounting principles and is the standard adopted by the Securities and Exchange Commission (SEC) in the U.S. Except for foreign companies, all companies that are publicly traded must adhere to the GAAP system of accounting. An entity using IFRS rules can classify equity method investments as "held for sale," which is not possible under GAAP. There is also no condition precluding continuing involvement with IFRS treatment. Like GAAP, however, discontinued operations under IFRS are represented by their own section on an income statement.

The income statement is one of the three important financial statements used for reporting the financial performance of a company over a specific accounting period. An income statement is a financial statement that reports the income and expenditure of a company over a period of time. This financial statement is also known as a profit and loss statement (P&L), or a statement of revenue and expense. Under IFRS, a mixed presentation of expenses on the income statement is not permitted. This means that it’s not possible for instance, to present amortization and depreciation in separate line items in a presentation by function. However, regardless of the approach used, companies need to make sure the presentation is not misleading and is relevant to the understanding of the financial statements.

Income statement presentation: IFRS compared to US GAAP

The applications vary slightly from program to program, but all ask for some personal background information. If you are new to HBS Online, you will be required to set up an account before gaap vs ifrs income statement starting an application for the program of your choice. GAAP specifies that dividends paid be accounted for in the financing section, and dividends received in the operating section.

• Under US GAAP prior to 2015, debt issuance costs were capitalized as an asset on the Balance Sheet.
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• A type of item that is clearly unrelated to, or only incidentally related to, the normal and usual activities of the company can be defined as unusual.
• No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
• The focus of this publication is primarily on recognition, measurement and presentation.
• However, adjusted EBITDA will be included in a separate reconciliation section rather than directly showing up on the actual income statement.
• Under GAAP, current assets are listed first, while a sheet prepared under IFRS begins with non-current assets.

US GAAP considers each quarterly report as an integral part of the fiscal year, and a Management’s Discussion and Analysis section (MD&A) is required. However, IFRS provides greater discretion with respect to which section of the Statement of Cash Flows these items can be reported in. Generally, IFRS is described as more principles-based whereas US GAAP is described as more rules-based.

GAAP vs. IFRS: What's the Difference?

In order to present a fair depiction of the business conducted, publicly-traded companies are required to follow specific accounting guidelines when reporting their performance in financial filings. The format and content of the income statement are factors when comparing IFRS vs GAAP income statement presentation. IFRS doesn’t prescribe the format of the income statement whereas GAAP prescribes the format and minimum line items to be presented for SEC registrants. GAAP dictates a specific format in which an income statement should be prepared, i.e. either using a single-step or multiple-step format.

• Unlike IFRS, the presentation of NGFMs in financial statements by SEC registrants or non-SEC registrants is generally prohibited under GAAP.
• Companies with the intention of going public should be prepared to respond to future challenges based on these considerations.
• In practice, investors are increasingly looking to, and companies are increasingly presenting, NGFMs.
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• Furthermore, items shouldn’t be displayed with more prominence than the other items required in the income statement.

Investors and financial analysts must be sure they understand which set of standards a company is using, and how its bottom line or financial ratios will change if the accounting system were different. The important difference from this change, that companies with leases may see a material increase in non-current assets and the corresponding debt obligations on their balance sheets, is relevant for both US GAAP and IFRS. Footnotes are essential sources of additional company-specific information on the choices and estimates companies make and when discretion is exerted, and thus useful to all users of financial statements. We believe it is possible to characterize items as unusual or exceptional under certain conditions. This should be infrequent and reserved for items that justify a prominence greater than that achieved by separate presentation and disclosure – e.g. a natural disaster. Those items should also be classified by nature or function, in the same way as usual or non-exceptional amounts.

GAAP vs. IFRS: An Overview

IFRS is a principle of the standard-based approach and is used internationally, while GAAP is a rule-based system compiled in the U.S. In the US, under GAAP, all of these approaches to inventory valuation are permitted, while IFRS allows for the FIFO and weighted average methods to be used, but not LIFO. Three methods that companies use to value inventory are FIFO, LIFO, and weighted inventory. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.

Today, IFRS has become the global standard for the preparation of public company financial statements and 144 out of 166 jurisdictions require IFRS standards. The treatment of acquired intangible assets helps illustrate why the International Financial Reporting Standards (IFRS) are considered more principles-based. Under IFRS, they are only recognized if the asset will have a future economic benefit and has measured reliability. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ("DTTL"), its network of member firms, and their related entities.

These rules help investors analyze and find the information they need to make sound financial decisions. The predecessor to the IFRS Foundation, the International Accounting Standards Committee, was formed in 1973. Initial members were accounting bodies from Australia, Canada, France, Germany, Japan, Mexico, Netherlands, the U.K., and the United States.