Long Live the Assets
July 30, 2012 § Leave a comment
So far I have explained how GAAP and IFRS differ when it comes to income statements and inventory. This blog will focus on how they differ in regards to non-current assets. Non-current assets are assets that will not be used up entirely in one year. If a company plans to have an asset on it’s books longer than a year, then it is considered a non-current asset.
The first type of non-current assets that GAAP and IFRS differ about is long-lived tangible assets. This pretty much just includes property, plant, and equipment. When a company has an old building or piece of land that they want to restore or overhaul, they have to pay for it. GAAP requires that this overhaul cost be expensed in the correct period. On the other hand, IFRS says that this cost should be added to the value of the asset.
I agree with IFRS that the cost should be added to the asset. When the company does a major overhaul to a building, it adds value to that building. When it is time to sell that building they will be able to get more money for it. Therefore, it is not an expense. An expense is when you spend money on something and you can’t get any of that money back. In this case, the company is spending money on the building, but getting some of that money back when they sell the building.
Some other minor differences in long-lived assets involve investment properties and cost basis. GAAP requires that investment properties be carried at depreciated cost and that cost basis be used. IFRS says that investment properties be carried at depreciated cost or fair value and that companies can use cost basis or revaluation to fair value. I agree with GAAP about these two rules. Having only one option to do things makes things easier and it makes companies more comparable.
The second type of non-current assets that GAAP and IFRS differ about is long-lived intangible assets. This includes goodwill and research and development. When a company buys another company for less than it is worth, they recognize that difference as goodwill. This goodwill can become impaired as the market changes. Under GAAP, this impairment must be measured with reference to fair value, while IFRS says it must be measured with reference to higher of value in use or fair value less costs to sell. GAAP also doesn’t allow reversals of impairment, while IFRS does. IFRS has the better rule here because it allows companies to get a more current value of the impairment.
GAAP and IFRS also differ when it comes to how to capitalize and expense research and development costs. GAAP states that all expenditures related to research and development be expensed as incurred. IFRS states that research costs be expensed, but development costs be capitalized until they reach technological feasibility. I agree with GAAP on this rule because IFRS is going to end up eventually expensing research and development, so why not do it at the beginning instead of the end.