In Brief

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IFRS is the predominant set of accounting standards used by listed companies outside the United States. Some of these companies pursue and achieve a listing in the United States, and many of those companies submit IFRS-basis financial statements to the SEC to support their listing in the U.S. market. This article examines the reporting by the largest foreign private issuers using IFRS to identify the differences they exhibit in their reporting with U.S. GAAP. The study documents a number of lingering differences with GAAP, some of which have significant impact on closely followed financial statement items. Absent a renewal of previous convergence efforts, or a decision by the SEC to require that U.S. domestic registrants adopt IFRS, the present condition will likely continue for the foreseeable future.

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In 2002, the world’s two leading accounting standards setters, FASB and the IASB, agreed to a formal convergence agenda aimed at reducing the existing differences between U.S. GAAP and IFRS to the point where the SEC might act to require that U.S. listed companies switch to using the IFRS standards. Following several years of noteworthy progress in narrowing GAAP-IFRS differences, in 2012 the SEC issued a Final Staff Report on its proposal to require that U.S. domestic registrants adopt IFRS, effectively postponing any decision on this matter.

Some further reduction of differences has followed, with both boards issuing final standards on revenue recognition (2015) and lease accounting (2016). Adding to that, FASB has adopted targeted aspects of IFRS for such matters as extraordinary items, inventory write-downs and balance sheet classification of deferred income taxes; yet despite the progress made, significant differences remain. (For a listing of some of the most important differences, see “Seeking Truly Global Financial Reporting Standards,” by P. Harris, E. Jermakowicz and B. Epstein, The CPA Journal, January/February 2022, pp. 36-41.)

In the current environment, those who engage in cross-border investing or financing activities should be cognizant of the continuing differences between GAAP and IFRS. As an example, many of the larger public accounting firms have published lengthy guides on these differences. For example, PricewaterhouseCoopers’s most recent edition of IFRS and US GAAP: Similarities and Differences (June 2023) is 236 pages long. PricewaterhouseCoopers’s comments in its guide that, given the many ongoing differences, it is important for preparers and users of financial information in the United States to be financially bilingual; that is, familiar with both GAAP and IFRS and the significant differences between them.

This article examines the use of IFRS standards by global companies, focusing on a small set of the largest foreign private issuers reporting to the SEC on an IFRS basis. The article identifies and analyzes the most common IFRS-GAAP differences exhibited by the eight largest foreign registrants. The findings highlight the extent and nature of the differences with GAAP standards that remain in these companies’ reporting to U.S. capital providers.

100 Largest Global Companies

The process began with identifying the 100 largest companies in the Fortune Global 500 Companies list for 2021 (see https://fortune.com/global500/). Exhibit 1 provides summary information for these companies, focusing on the set of accounting standards each uses in its reporting. Of the 100 largest companies, 36 are based in the United States, and use U.S. GAAP. The remaining 64 companies are based outside the United States, and most (50) use IFRS (78.1%). All 50 of those companies apply IFRS as issued by the IASB. Almost half of the foreign companies are based in China (30), followed by Germany (9), Japan (6) and France (5). Of the foreign companies, three more use IFRS as adopted in the home country: Saudi Aramco uses the IFRS as adopted in Saudi Arabia; and Samsung Electronics and Hyundai Motor use the IFRS as adopted in South Korea. The standards these three companies use are similar to IFRS, but not necessarily the same.

Exhibit 1

Accounting Standards for 100 Largest Global Companies1

Based in U.S.; Based Outside U.S.; Total Number of companies; 36; 64; 100 Company uses IFRS2; 0; 50; 50 Company uses U.S. GAAP; 36; 3; 39 Company uses other national GAAP; 0; 11; 11 36; 64; 100 1 100 largest global companies as determined by the Fortune Global 500 list for 2021 (see https://fortune.com/global500/). 2 Company uses IFRS as issued by the IASB.

The remaining 11 foreign companies use a national GAAP. The national GAAPs used include China’s Accounting Standards for Business Enterprises (4), U.S. GAAP (3), Hong Kong GAAP (2) and Japanese GAAP (2). Those using U.S. GAAP are listed in the U.S. market and include JD.com and Alibaba Group, both based in China, and Sony Group, based in Japan.

In total, 89 of the 100 largest companies use one of the two leading sets of standards. A slight majority of the world’s 100 largest companies use IFRS or national standards closely tied to IFRS (53). Of interest are the subset of IFRS users who are listed in the U.S. market and submit IFRS-basis financial statements to the SEC.

Largest Foreign Private Issuers

Of the 100 largest global companies, eight submit IFRS-basis financial statements to the SEC (Exhibit 2). In 2007, based upon the convergence progress made to that point, the SEC removed the requirement for foreign registrants to provide detailed conversions of income and equity to a GAAP basis. This exemption applies only to foreign registrants who use IFRS as issued by the IASB. All eight of the identified companies state in their notes, as required by IFRS, that they have applied the IFRS standards as issued by the IASB. The home country profile for this subset is similar to that for the 100 largest companies: three from China, two from both Japan and the United Kingdom, and one from France.

Exhibit 2

Largest SEC Foreign Private Issuers Using IFRS

Company; Ticker Symbol; Fortune Global 500 Rank; Revenue (millions of $)1; Home Country; SEC 20-F Filing (Year-end) PetroChina Co.2; PTR; 4; 283,958; China; 12/31/21 Sinopec Shanghai Petrochemical Co.; SHI; 5; 283,728; China; 12/31/21 Toyota Motor Corp.; TM; 9; 256,722; Japan; 03/31/21 BP plc; BP; 18; 183,500; UK; 12/31/21 Shell plc; SHEL; 19; 183,195; UK; 12/31/21 China Life Insurance Co.; LFC; 32; 144,589; China; 12/31/21 Honda Motor Co.; HMC; 48; 124,241; Japan; 03/31/21 TotalEnergies SE; TTE; 52; 119,704; France; 12/31/21 1 Revenue as reported in the Fortune Global 500 list for 2021 (see https://fortune.com/global500/). 2 The #4 company in the Fortune Global 500 list for 2021 is China National Petroleum. This article examines the reporting by PetroChina Company Limited, a publicly traded subsidiary of China National Petroleum that is listed in the United States.

Differences Exhibited by Largest Foreign Issuers

For each of the eight companies, the authors examined the company’s Form 20-F filing for 2021 to identify differences in the company’s IFRS basis reporting with GAAP standards. As a starting point, the authors considered the IFRSGAAP differences highlighted by Harris, Jermakowicz and Epstein. The authors considered other differences as well from reviews of IFRS-basis financial statements prepared by other companies. The authors focused upon the core accounting functions of recognition, measurement, and classification (e.g., net income versus other comprehensive income, operating versus investing versus financing for cash flows). The authors prioritized differences that can be discerned from each company’s reporting in its financial statements and note disclosures. Exhibit 3 shows the resulting list of 32 differences and the findings for each of the eight companies.

Exhibit 3

IFRS-GAAP Differences for Largest Foreign Private Issuers

Companies Differences; PTR; SHI; TM; BP; SHEL; LFC; HMC; TTE Inventory—reversal of write-downs; 1; 2; 2; 2; 2; 2; 2; 2 Financial assets—capitalize transaction costs; 1; 1; 1; 1; 1; 1; 2; 2 Equity investments: —measurement (fair value only); 3; 3; 3; 3; 3; 4; 3; 3 —classification (other comprehensive income); 1; 1; 1; 1; 1; 1; 1; 1 —reclassification within equity; 1; 1; 1; 1 Fixed assets: —recognition (interest during construction); 2; 1; 2; 2; 2; 2; 2; 2 —component depreciation; 4; 4; 4; 3; 4; 3; 4; 4 Intangible assets: —recognition (development costs); 1; 1; 1; 1; 1; 2; 1; 1 —measurement (goodwill for<100% interest); 1; 1; 1; 1; 1; 1 Impairment: —recognition (1-step approach); 1; 1; 1; 1; 1; 1; 1; 1 —measurement (recoverable amount); 1; 1; 1; 1; 1; 1; 1; 1 —recognition (reversal of impairment); 1; 1; 2; 1; 1; 1; 1; 1 Operating assets—revaluation model Investment property—revaluation model Liabilities: Provisions: —recognition (constructive obligations); 1; 1; 2; 1; 1; 1; 1; 1 —recognition (meaning of probable); 2; 2; 2; 2; 2; 2; 2; 2 —measurement (range of loss amounts); 2; 2; 2; 2; 1; 2; 2; 2 —measurement (discounting for time value); 4; 3; 4; 3; 3; 4; 3; 4 —recognition (restructurings); 2; 2; 2; 1; 1; 2; 2; 2 Pensions: —classification (past/prior service costs); 1; 1; 1; 1; 1 —classification (return on plan assets); 1; 1; 1; 1; 1 —classification (remeasurement gain/loss); 1; 1; 1; 1; 1 —reclassification within equity; 1; 1; 1 —measurement (ceiling on reporting surplus); 1; 1; 1; 1; 1 Uncertain tax positions—provisions model; 2; 1; 2; 1; 2; 2; 1; 2 Other Differences: Consolidation: —control criterion; 1; 1; 1; 2; 1; 1; 1; 1 —consideration of potential voting rights; 2; 2; 2; 1; 2; 2; 2; 2 Leases: —lessee classification (finance only); 1; 1; 1; 1; 1; 1; 1; 1 —lessee classification (low-value leases); 1; 1; 1 Cash flow statement: —classification (interest received: investing); 1; 1; 1; 1 —classification (dividends received: investing); 1; 1; 1 —classification (interest paid: financing); 1; 1; 1 Key: 1—Company cited use of a policy that is not permitted by GAAP. 2—Company did not cite the policy, but the required IFRS treatment is not permitted by GAAP. 3—Company cited use of a policy that GAAP permits, but is not commonly used by U.S. companies. 4—Company did not cite the policy, but the treatment is required by IFRS and seldom used by U.S. companies.

This analysis identified four types of differences, coded 1 through 4. A code of 1 signifies a treatment the company described or exhibited in its reporting that is not permitted by GAAP. For example, a company elected to count unrealized gains and losses on investments in equity securities in other comprehensive income (OCI), not net income (NI). A code of 2 indicates a treatment the company did not address in its reporting, but that IFRS requires and GAAP does not allow; for example, a company does not mention recognizing reversals of inventory write-downs, but IFRS standards require this. A code of 3 signifies a treatment described or exhibited that is a permitted alternative in GAAP, but not widely used by U.S. companies; for example, a company states it uses component depreciation, meaning it identifies and separately depreciates material components of a fixed asset that have shorter useful lives. Finally, a code of 4 indicates a treatment the company did not address, but that IFRS requires and GAAP merely permits; for example, a company does not mention component depreciation, though IFRS requires its use.

This analysis excludes treatments that GAAP requires or permits, but IFRS does not. One example is that IFRS does not allow use of the last in, first out (LIFO) method; companies must choose either first in, first out (FIFO) or the weighted average method. A foreign registrant reporting using one of those methods is compatible with GAAP, which permits both methods. This analysis relies upon the company’s policies and actual disclosures, clearly indicated, that are not permitted, or at least not widely used, in U.S. filers’ GAAP-basis financial statements. The findings for the eight companies are discussed, issue-by-issue, as follows.

Inventory.

As noted above, IFRS requires companies to recognize reversals of impairment for inventory. GAAP does not permit a reversal in a subsequent fiscal year. One company (PetroChina) indicated use of this procedure and reported a reversal gain in 2021 of RMB 76 million (renminbi).

Investments.

Contrary to GAAP, all eight companies stated they capitalize transaction costs for the purchase of financial assets not reported at fair value through NI. GAAP requires expensing of these costs, as capitalizing them would distort the initial measurement at fair value.

The companies’ reporting exhibited several differences with GAAP for passive investments in equity securities. All eight companies employed an elective option in IFRS to designate, security by security at initial recognition, the counting of unrealized gains and losses on investments in marketable equity securities in OCI. Toyota Motor counted a ¥560,225-million unrealized gain on equity securities in OCI in 2021 (24.5% of NI). Furthermore, half of the companies demonstrated use of another elective option, this one to reclassify the accumulated unrealized gain or loss at the time of sale directly to retained earnings. As an example, Toyota Motor in 2021 transferred a ¥31,321-million accumulated OCI gain directly to retained earnings upon the sale of the securities. GAAP requires that companies count unrealized gains and losses on such investments in NI; as a general principle, GAAP prohibits direct transfers of accumulated OCI to retained earnings.

The companies exhibited another difference with GAAP in the accounting for equity investments. IFRS requires that all investments in marketable equity securities be reported at fair value, even if the fair value must be estimated. Seven of the eight companies reported all passive investments in equity securities at fair value. GAAP also calls for fair value reporting of these securities, but it grants a measurement exception that can be applied when fair value is not readily determinable, such as for an investment in private company shares. U.S. companies may elect to report such investments at cost, less any impairment.

Fixed assets.

The analyzed companies exhibited several differences in the accounting for fixed assets. Sinopec stated that it considers interest earned on borrowed funds in determining the amount of borrowing cost to capitalize for a constructed asset; this treatment is required by IFRS. In contrast, GAAP does not permit interest earned to be factored into the interest cost capitalized for a constructed asset. In addition, two companies (BP and China Life Insurance) stated they use component depreciation, a treatment IFRS requires and GAAP permits, but does not require.

Intangible assets.

Two treatments for intangible assets that differ with GAAP were identified. Seven of the eight companies stated they capitalize qualifying development costs, a treatment IFRS requires. Honda Motor reported a development cost intangible asset at fiscal year-end 2021 of ¥1,108,616 million (11.8% of equity). With the exception of certain software development costs, GAAP calls for spending on development activities to be expensed as incurred. In addition, six of the companies used an elective treatment in IFRS that reduces the initial measurement of goodwill. IFRS permits companies to elect, acquisition-by-acquisition, to initially measure a noncontrolling interest in an acquiree at its share of the fair value of the acquiree’s identifiable equity. Effectively, the excess of fair value over the fair value of identifiable equity that gives the initial value of goodwill is considered only to the extent of the acquirer’s controlling interest. GAAP requires the full goodwill to be recognized, including for the noncontrolling interest that continues to be held by outside owners.

Impairment.

The two sets of standards differ in their approaches to the accounting for impairment of noncurrent assets. They differ in their scopes, with the IFRS guidance applying to a larger set of assets, including goodwill and significant influence investments. They differ in their recognition and measurement guidance as well. The discussion here focuses upon the impairment accounting procedures for limited-life fixed assets and intangible assets other than goodwill.

Both standards employ an indicator-based approach, meaning that quantitative testing is not needed in the absence of an indicator of impairment. IFRS uses a one-step procedure whereby impairment is recognized for all cases in which the measure of the asset group’s value falls below the group’s carrying amount. In contrast, GAAP uses a two-step procedure. In the first step, a company compares the asset group’s carrying amount to the undiscounted future cash flows the company expects to generate from the continued use of the asset group to essentially filter out losses that are not sizable. With the GAAP procedure, a loss might exist and not be recognized. The standards also differ in their measurement of the loss. IFRS requires a write-down to the asset group’s recoverable amount (defined as the higher of the value from selling and the value from continuing use), while GAAP calls for a write-down to the asset group’s fair value (meaning the exit value). The two measures of value could differ, particularly where the company expects to derive greater value for the continuing use of the asset group.

Furthermore, with respect to inventory, IFRS requires continued monitoring of the asset group for a recovery in value, whereas GAAP views the write-down as creating a new cost basis that cannot be exceeded in subsequent periods. The companies disclosed nearly all of the required IFRS treatments in their reporting. All but one of the companies stated that it recognizes reversals of impairment. For example, BP reported a reversal of prior write-downs on fixed assets in 2021 totaling $4,827 million (31.7% of NI).

Revaluation model.

A frequently cited example of the differences between IFRS and GAAP, and one that illustrates the wider use of fair value measures in IFRS reporting, is the revaluation model option that IFRS provides for fixed and intangible assets. None of the eight companies elected a revaluation model for these assets. Along the same lines, none of them elected a revaluation model approach for investment property. Two companies (Sinopec and China Life Insurance) addressed their accounting for investment property, and both stated they use a cost-depreciation-impairment model, the same as GAAP.

Provisions.

Turning to liabilities, IFRS and GAAP differ in several ways in their accounting for provisions. In GAAP terminology, provisions are the same as loss contingencies that meet the probable and reasonably estimable conditions for recognition. Seven of the eight analyzed companies stated that they recognize provisions for both legal obligations and constructive ones. As an example of a constructive obligation, a company might adopt and broadcast a policy to address any environmental damage it causes, even in the absence of a legal requirement to do so. The GAAP guidance applies to legal obligations only. The two standards impose differing probability levels for recognizing a provision. Both use the term probable, but the IFRS standards define the term in this context as meaning more likely than not (i.e., more than 50%) to occur. None of the companies made any reference to the actual “more likely than not” threshold.

IFRS and GAAP differ in their measurement guidance as well. When the loss falls within a range of equally likely amounts, IFRS requires companies to accrue the median of the range, whereas GAAP calls for recording just the minimum of the range. One of the companies (Shell) stated that it used mid-range amounts in its measurement process. The standards also differ in their views on discounting for time value. IFRS requires discounting for time value in determining the amount to book for a provision. GAAP allows a policy choice to discount future cash flows when their timing is fixed or reasonably determinable.

Two companies (BP and Shell) addressed their accounting for restructuring charges. They described the IFRS requirement that companies must recognize a provision for restructuring once a formal plan has been adopted and the details of the plan have been communicated to those affected. The GAAP guidance delays recognition until a company has made legally binding offers to those affected (i.e., a legal obligation).

Pensions.

The five companies that sponsor defined-benefit pension plans noted the detailed IFRS guidelines pertaining to measurement and income classification, guidelines that differ from GAAP. The three companies based in China contribute to government-sponsored plans, and their accounting is similar to what U.S. companies do for their matching share of Federal Insurance Contributions Act (FICA) cost (i.e., expense as incurred). Most of the IFRSGAAP differences for this issue relate to income classification. All five companies exhibit the following differences that impact income classification:

  • ▪ All cited expensing past service costs through NI in the period the costs arise. As an example, Honda Motor counted a ¥9,941 million expense for new past service costs in its 2021 NI (1.4% of NI).
  • ▪ All stated they count as investment revenue in NI just the interest computed on the beginning plan assets. As an example, Honda Motor counted just ¥29,103 million of the ¥349,754 million actual return on plan assets in its 2021 NI (8.3% of the actual return).
  • ▪ All recognized their pension remeasurement gains and losses immediately in OCI, with no subsequent reclassification to NI.

In the current environment, those who engage in cross-border investing or financing activities should be cognizant of the continuing differences between GAAP and IFRS.

Closely related to the third difference, three of the companies use an IFRS-permitted practice of transferring remeasurement gains and losses from accumulated OCI to retained earnings in the period they arise. As an example, Toyota Motor reclassified a ¥219,047-million net remeasurement gain directly to retained earnings in 2021. Furthermore, all five stated they observe a limitation on the asset amount they report for plans that have a surplus, as required by IFRS. IFRS limits the recognition of the pension asset in this case to just the amount the company can recover from the plan, including through reduced contributions in future periods. Three of the companies identified limitations on reported pension surpluses at their 2021 year-ends: Shell, Honda Motor and TotalEnergies.

GAAP requires immediate recognition of prior service costs in OCI, with a gradual reclassification to NI through an amortization process. In contrast to IFRS, GAAP counts the expected return in NI, with potential for the unexpected return to eventually be reclassified to NI as well, via the “corridor method.” In contrast to Honda Motor counting just 8.3% of its pension investment return in NI for 2021, Ford Motor and General Motors counted 199.1% and 87.4%, respectively, of their actual pension returns in their 2021 NI. GAAP allows the counting of remeasurement gains and losses in OCI, though it requires a gradual reclassification to NI through the corridor method once the accumulated amount becomes material. As noted above for equity investments, GAAP, as a general principle, does not permit direct transfers within equity to the retained earnings. Finally, GAAP does not impose a limitation for recognition of plan surpluses.

It is very evident that many lingering differences can hamper meaningful comparisons of IFRS-basis and GAAP-basis information.

Uncertain tax positions.

In 2017, the IASB provided guidance on uncertain tax positions (International Financial Reporting Interpretations Committee Interpretation 23, Uncertainty Over Income Tax Treatments) that draws upon the accounting guidance for provisions. In essence, if a company believes it is probable (i.e., more likely than not) the taxing authority will not accept a tax position (or set of positions), the company must reduce the measurement of the effects of the position to reflect the best estimate of the benefit to be realized. GAAP uses a more restrictive test for recognition and a rather different approach to measurement. Under GAAP, the effects of an uncertain tax position should be recognized only if a company believes it is more likely than not the position will be accepted on its technical merits in a review by the taxing authority, and the position should then be measured as the largest amount of benefit viewed as more than 50% likely to be realized. Three of the companies cited an approach similar to that for provisions.

Consolidation.

GAAP uses a dual-track model which establishes separate guidance for identifying control of variable-interest and voting-interest entities. IFRS does not provide distinct guidance for variable-interest entities; rather, inter-company relationships must be evaluated to determine if the reporting company has the power to shape the returns received from the related entity. The IFRS guidance does not view majority ownership as the sole criterion for consolidation the way that GAAP does for voting-interest entities. Thus, it is quite possible under IFRS for a company to consolidate an investment while holding 50% or less of the investee’s shares. All of the companies except BP cite this control standard; one (TotalEnergies) identifies approximately 15 investees where it holds a voting interest of 50% or less that it consolidates. GAAP might call for consolidation of these entities too, but only if they qualified as variable-interest entities. Due to the differing tests for control, differences could arise in the set of related entities consolidated.

Lease accounting.

With the issuance of new standards on lease accounting, the differences between IFRS and GAAP in this area have been reduced, though not completely eliminated. All eight companies cited the IFRS requirement for lessees to recognize a right-of-use asset and related liability for all leases. GAAP is similar, though it creates two accounting categories for lessees: finance leases and operating leases. The finance and operating categories differ mainly in terms of income reporting. For finance leases, the lessee recognizes depreciation and interest expenses, and for operating leases, the lessee recognizes lease expense on a straight-line basis. IFRS views all leases from the lessee perspective as finance leases.

In addition, IFRS includes an elective option for lessees, on a lease-by-lease basis, to account for leases of low-value assets as simple rentals, with no capitalization required. In the “Basis for Conclusions” section of IFRS 16, Leases, the IASB suggested that low-value assets be viewed as those that, when new, had a purchase cost of no more than $5,000. Three companies (PetroChina, China Life Insurance, and TotalEnergies) stated that they use this elective option, at least sometimes. GAAP, too, grants an exemption, a policy option for short-term leases of 12 months or less. The two sets of leases that can be exempted from capitalization likely are not the same.

Cash flow statement.

IFRS permits discretion through policy options for the classification of cash flows received for interest and dividends and paid for interest. Half of the eight companies classified interest received as investing inflows, and three of them classified dividends received in the same way. A slightly different group of three companies classified interest paid as financing outflows. Two companies opted for all three of these classifications: PetroChina and China Life Insurance. GAAP requires all of these cash flows to be classified as part of operating activities. If China Life Insurance had used the GAAP classifications, its operating cash flow for 2021 would have been ¥166,294 million higher (58.1% of reported operating cash flow).

Toyota Motor’s Conversion from GAAP to IFRS

One of the companies, Toyota Motor, offers an interesting opportunity for seeing the effects of IFRS-GAAP differences. Through fiscal year-end March 31, 2020, Toyota used U.S. GAAP. In 2021, the company adopted IFRS as issued by the IASB, effective from April 1, 2019. IFRS 1, First-time Adoption of International Financial Reporting Standards, requires companies making a first-time adoption of IFRS to use a retrospective approach, with certain elective exemptions. Companies must establish the IFRS-basis amounts for balance sheet items as of the transition date, and clearly present the adjustments needed to produce those amounts; Toyota does so through Note 36 in its 2021 Form 20-F filing.

Toyota elected exemptions to full retrospective adoption for several items: business combinations, cumulative translation adjustments, equity investments at fair value through OCI, fixed assets, and lessee right-of-use assets and liabilities. As a result, the company’s reporting did not reflect the full extent of IFRS-GAAP differences for these items. Toyota identified approximately 30 adjustments to asset and liability line items. The net effect on Toyota’s equity was an increase of ¥1,479,456 million, 2.85% of the company’s GAAP-basis equity. Exhibit 4 shows the largest adjustments to asset and liability line items as of the April 1, 2019 transition date.

Exhibit 4

Toyota Motor Corp.’s Largest GAAP-to-IFRS Balance Sheet Adjustments1

Element; Balance Sheet Item; Adjustment (millions of ¥); Increase/Decrease Asset; Intangible assets; 611,643; Increase Asset; Right-of-use assets; 369,517; Increase Liability; Long-term debt; 293,298; Increase Liability; Deferred income taxes (net)2; 256,260; Increase Liability; Short-term borrowings; 102,580; Increase Asset; Investments in affiliates; 99,516; Increase Asset; Inventories; 74,644; Increase Asset; Marketable equity securities; 51,806; Increase 1 From Note 36 in Toyota Motor's Form 20-F filing for the year-ended March 31, 2021. 2 Toyota Motor reported a decreasing adjustment to deferred tax assets of ¥55,489 million and an increasing adjustment to deferred tax liabilities of ¥200,771 million. The combined effect was to increase the net deferred tax liabilities item by ¥256,260 million.

The single largest adjustment was the capitalization of development costs, a treatment required by IFRS. Toyota added a development cost asset of ¥611,643 million, an amount likely expensed under GAAP. Three of the other items shown in the table pertain to lease accounting. In 2020, applying GAAP, Toyota adopted the new GAAP standard on lease accounting (ASU 2016-02, Leases). ASU 2016-02 specified a modified retrospective approach to account for the change in method; also, Toyota elected a practical expedient to simply capitalize its existing operating leases based upon their remaining minimum lease payments. Toyota’s reporting on the adoption of IFRS compared the balance for capitalized leases as of April 1, 2019, under old GAAP with the IFRS balance determined according to IFRS 16. As a result, the company added approximately ¥370,000 million to right-of-use assets and current and long-term liabilities.

Toyota reported a ¥74,644 million increase in inventories associated with a change from LIFO (GAAP reporting) to the weighted-average method (IFRS reporting). The company holds investments in unlisted shares, and the change from the cost-impairment model elected under GAAP to the fair value model required by IFRS increased these equity investments by ¥51,806 million. Lastly, Toyota reported an increase to net deferred income taxes (liability) resulting from the series of GAAP-to-IFRS adjustments that increased carrying amounts for assets more than for liabilities.

A Continuing Need for Adjustments and Conversions

The eight largest foreign registrants reporting on an IFRS basis exhibited many differences with GAAP. For some items, the companies triggered differences with GAAP through elections they made in applying IFRS. Without question, the convergence efforts of the FASB and IASB in this century have reduced the observed differences. Yet, it is very evident that many lingering differences can hamper meaningful comparisons of IFRS-basis and GAAP-basis information. For some differences, where the IFRS-basis reporting allows, financial statement users might benefit from adjusting the reported information to reflect a GAAP basis. Much the way some users might have capitalized operating leases in the past or might use LIFO reserve information today, users may be able to improve comparability by converting certain items to a GAAP basis.

One of the items for which adjustment may be possible is a reported development costs asset under IFRS. Users of financial statements may be able to de-capitalize the development costs asset and determine a GAAP-basis research and development expense for the year. To illustrate, consider Honda Motor. Honda disclosed a development costs asset as of its March 31, 2021, year-end of ¥1,108,616 million. To convert the company’s reporting to a GAAP basis, the asset would need to be removed, with the offset (after taxes) reducing retained earnings. For the income statement, starting with the company’s reported research and development expense for 2021 (¥806,905 million), the new development costs capitalized in 2021 (¥201,889 million), would need to be added, and the capitalized development costs amortized in 2021 (¥144,795 million), would need to be subtracted. The resulting expense on a GAAP basis, ¥863,999 million, is 7.1% higher than the IFRS-basis expense.

Other adjustments that could be made fairly easily include the reclassification of cash flows for interest received, dividends received, and interest paid to reflect a GAAP basis. But for many other items, such as defined-benefit pension plans, it would be difficult, if not impossible, to produce GAAP-basis amounts for the NI and OCI effects and the accumulated OCI.

For the present situation (with two leading but different sets of standards in use) to improve, FASB and the IASB would need to restart their convergence efforts—or the SEC would need to dust off its 2008 proposal for U.S. listed companies to move to IFRS. Neither of those actions seems likely at this time, meaning the existing set of differences will remain, at least for the foreseeable future.

Kennard S. Brackney, PhD, CPA, is the Kenneth E. Peacock Distinguished Professor in the department of accounting at the Walker College of Business, Appalachian State University, Boone, N.C.
Wenye Tang, PhD, CPA, is an assistant professor in the department of accounting at the Walker College of Business, Appalachian State University, Boone, N.C.