Financial Accounting: In an Economic Context

IFRS VS. U.S. GAAP: REVALUATIONS TO FAIR MARKET VALUE

One very important way in which IFRS differs from U.S. GAAP involves the use of fair market value as a basis for valuation on the balance sheet and, as shown in this chapter, there is no better example of this difference than in the area of long-lived assets. Under U.S. GAAP, long-lived assets must be accounted for at original cost less accumulated depreciation (amortization), and if the market value of the asset permanently falls below the balance sheet carrying value, an impairment charge must be recorded, and cannot be reversed in later periods if the value of the asset recovers. Under IFRS, companies can either follow the U.S. GAAP method or they can periodically revalue their long-lived assets to fair market value—recognizing not only impairments, but also increases and recoveries of asset values. In essence, U.S. GAAP tends to follow a conservative “lower-of-cost-or-market” valuation principle, where market price reductions are recognized but market price increases are not. IFRS, by contrast, allows managers the option to more closely follow a pure market valuation principle, where both market value increases and decreases are recognized.

Interestingly, while IFRS companies have the option to follow a market value approach, most choose not to. Active markets often do not exist for long-lived assets because assets like property, plant, and equipment, as well as intangibles, are frequently customized for the specific needs ...