What are the most important IFRS vs US GAAP differences tested at CFA Level II?

Question

AcadiFi · Accepted Answer

Here is a comprehensive summary of the most-tested IFRS vs US GAAP differences at CFA Level II, organized by topic.

**Revenue Recognition:**

| Topic | IFRS | US GAAP |
|---|---|---|
| Standard | IFRS 15 | ASC 606 |
| Framework | Largely converged | Largely converged |
| Key difference | Minor guidance differences | More detailed application guidance |

**Inventory:**

| Topic | IFRS | US GAAP |
|---|---|---|
| LIFO allowed? | No | Yes |
| Write-down basis | Lower of cost and NRV | Lower of cost or market |
| Write-down reversal | Yes (up to original cost) | No |

**Long-Lived Assets:**

| Topic | IFRS | US GAAP |
|---|---|---|
| Revaluation model | Allowed | Not allowed (cost model only) |
| Impairment test | One-step (CV vs recoverable amount) | Two-step (recoverability, then FV) |
| Impairment reversal | Yes (except goodwill) | No |
| Component depreciation | Required | Permitted but rare |

```mermaid
flowchart LR
    subgraph IFRS_Rules["IFRS Key Features"]
        A["No LIFO"]
        B["Revaluation Model"]
        C["Impairment Reversals OK"]
        D["Development Costs Capitalized"]
        E["Single Lease Model (Lessee)"]
        F["Net Interest for Pensions"]
    end
    subgraph GAAP_Rules["US GAAP Key Features"]
        G["LIFO Allowed"]
        H["Cost Model Only"]
        I["No Impairment Reversals"]
        J["All R&D Expensed"]
        K["Dual Lease Model (Lessee)"]
        L["Expected Return for Pensions"]
    end
```

**Leases:**

| Topic | IFRS 16 | ASC 842 |
|---|---|---|
| Lessee model | Single model (all capitalized) | Dual model (finance vs operating) |
| Operating lease P&L (lessee) | Depreciation + Interest | Single straight-line expense |

**Income Taxes:**

| Topic | IFRS (IAS 12) | US GAAP (ASC 740) |
|---|---|---|
| DTA recognition | Recognized if "probable" (> 50%) | Recognize fully, then VA if "more likely than not" |
| Approach | No valuation allowance concept | Valuation allowance reduces gross DTA |
| Tax rate changes | Use enacted or substantively enacted rates | Use enacted rates only |

**Pensions:**

| Topic | IFRS (IAS 19R) | US GAAP (ASC 715) |
|---|---|---|
| Return assumption | Discount rate on net position | Expected return on plan assets |
| Actuarial gains/losses | OCI, never recycled | OCI, amortized via corridor |
| Past service cost | Immediate P&L | Amortized from OCI |

**R&D:**

| Topic | IFRS (IAS 38) | US GAAP |
|---|---|---|
| Research | Expense | Expense |
| Development | Capitalize if 6 criteria met | Expense (narrow software exception) |

**Consolidation:**

| Topic | IFRS | US GAAP |
|---|---|---|
| Goodwill | Full or partial goodwill choice | Full goodwill only |
| VIE equivalent | Power + benefits approach | Primary beneficiary (power + losses/benefits) |

**The Key Analytical Implication:**

Companies reporting under IFRS vs GAAP are not directly comparable without adjustments. IFRS companies tend to have:
- Higher reported assets (revaluation, capitalized development)
- More balance sheet volatility (impairment reversals)
- Different pension expense composition
- Different lease expense patterns

**Exam Tip:** The CFA exam often presents a scenario where two companies use different standards and asks how the reported ratios would differ or what adjustments are needed for comparison.

Explore our CFA Level II FRA course for detailed IFRS/GAAP comparison materials.

What are the most important IFRS vs US GAAP differences tested at CFA Level II?

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Related Questions

Practice Questions

Topic	IFRS	US GAAP
Standard	IFRS 15	ASC 606
Framework	Largely converged	Largely converged
Key difference	Minor guidance differences	More detailed application guidance

Topic	IFRS	US GAAP
LIFO allowed?	No	Yes
Write-down basis	Lower of cost and NRV	Lower of cost or market
Write-down reversal	Yes (up to original cost)	No

Topic	IFRS	US GAAP
Revaluation model	Allowed	Not allowed (cost model only)
Impairment test	One-step (CV vs recoverable amount)	Two-step (recoverability, then FV)
Impairment reversal	Yes (except goodwill)	No
Component depreciation	Required	Permitted but rare

Topic	IFRS 16	ASC 842
Lessee model	Single model (all capitalized)	Dual model (finance vs operating)
Operating lease P&L (lessee)	Depreciation + Interest	Single straight-line expense

Topic	IFRS (IAS 12)	US GAAP (ASC 740)
DTA recognition	Recognized if "probable" (> 50%)	Recognize fully, then VA if "more likely than not"
Approach	No valuation allowance concept	Valuation allowance reduces gross DTA
Tax rate changes	Use enacted or substantively enacted rates	Use enacted rates only

Topic	IFRS (IAS 19R)	US GAAP (ASC 715)
Return assumption	Discount rate on net position	Expected return on plan assets
Actuarial gains/losses	OCI, never recycled	OCI, amortized via corridor
Past service cost	Immediate P&L	Amortized from OCI

Topic	IFRS (IAS 38)	US GAAP
Research	Expense	Expense
Development	Capitalize if 6 criteria met	Expense (narrow software exception)

Topic	IFRS	US GAAP
Goodwill	Full or partial goodwill choice	Full goodwill only
VIE equivalent	Power + benefits approach	Primary beneficiary (power + losses/benefits)