In this podcast episode, we cover the differences between GAAP and IFRS in the accounting for fixed assets. Key points made are noted below.

Recordation Differences

Fixed assets is an area where there’re really significant differences between GAAP and IFRS, so if you’re using GAAP right now and you think you’ll be switching over, then expect to be doing things differently in the future. The biggest difference is that IFRS allows you to either record a fixed asset at its cost, or to revalue it to fair value. But if you do revalue it, you have to revalue the entire class of assets, not just one asset within a class. By making you revalue an entire class of assets, IFRS makes sure that you can’t use selective revaluations. And the same thing goes for investment property. Under GAAP, you carry it at cost, but under IFRS, you have a choice of using either cost or fair value.

The obvious question is, how do you account for a change in an asset’s fair value under IFRS. Well, if an asset increases in value, then you recognize the gain in other comprehensive income and the offset is to a revaluation surplus in equity. And if the asset value decreases, then you recognize it as a loss. Now, if the value decreases and then goes back up again, you can recognize a profit to the extent of the original loss, and then drop the rest of the gain into other comprehensive income.

Asset Revaluations

Of course, there’s a problem with revaluing assets all the time, which is that it’s expensive and it’s time-consuming. So IFRS recommends revaluing about once every 3 to 5 years. And if you do revalue, IFRS recommends that you use a professional appraiser. So if you want a guaranteed job, become a professional appraiser.

Asset Impairments

Another major difference is the treatment of asset impairments. Under GAAP, if you have an impairment, then it’s charged to expense, and you cannot take it back. But under IFRS, if the asset’s value goes back up, you can take back the amount of the impairment. And also under IFRS, if you’re valuing fixed assets at their fair value and you recognize an impairment, then you treat the impairment as the reversal of any upward revaluation that you already recorded, to the extent of the revaluation. If the impairment exceeds the revaluation, then you charge the remainder against current income.

I really like the way this is handled under IFRS. Or – well – to be more specific, I really don’t like the way it’s handled under GAAP, which is very, very conservative. If an asset’s fair value goes up, you really should have the option to take back an impairment charge. And by the way, the way they calculate an impairment loss under the two systems is slightly different, but it shouldn’t result in much of a net change between the two, so I won’t go into the differences here.

Asset Overhauls

A less important difference is that if you pay for a major overhaul of an asset, you have to add the cost to an asset under IFRS, but you generally charge it to expense under GAAP.

Intangible Assets

And that covers the significant differences for tangible fixed assets. But then, we have intangible fixed assets, which are things like copyrights and patents. And there are some major differences here, too.

First, under GAAP, you charge all research and development costs to expense right away. But in IFRS, you charge research to expense but you capitalize development and then you amortize it. Now in order to capitalize development costs, you do have to meet a bunch of criteria, so it’s not that easy. Still, for a company doing a lot of development work, this could be major change.

And also, if you recognize impairment of an intangible asset under GAAP, then you can never reverse the impairment. But, under IFRS you can, though not if the intangible happens to be goodwill.

And finally, under some very limited circumstances, you can revalue intangible assets under IFRS, but you cannot do that under GAAP. The problem with revaluing an intangible asset is that there usually isn’t much of a market for this kind of asset, so you just can’t justifiably revalue it. And if you can’t justify a revaluation, then you have to carry it at cost.

Parting Thoughts

So, overall - there are a couple of key points to remember. First, GAAP is very conservative and rigid when it comes to valuing fixed assets, whereas IFRS allows you to take advantage of fair value changes, which is way more common sense.

Second, you could see a lot of companies in the R&D field finding an excuse to switch to IFRS, and then start capitalizing their development costs. But keep in mind, if you do that, you still have to amortize the costs eventually, so there may a reportable drop in development expenses in the first year or two, but over the long term, there won’t be much of an impact on their profits.

And finally, it does sound pretty nifty to be able to revalue your fixed assets, but you also have to pay for the appraisals, so there is an out-of-pocket cost if you choose to go down that path.