GAAP vs. IFRS: Long Lived Assets - Online Tutor, Practice Problems & Exam Prep

GAAP and IFRS share similarities in defining long-term assets like property, plant, and equipment (PPE) and intangibles, using historical cost for acquisition. Key differences include GAAP's use of "salvage value" versus IFRS's "residual value," and IFRS's allowance for revaluation to fair value, which GAAP prohibits. Additionally, IFRS permits component depreciation and capitalizes certain R&D costs, while GAAP mandates expensing them. Understanding these distinctions is crucial for navigating the accounting landscape effectively.

GAAP vs. IFRS: Long-Lived Assets

Alright, now let's discuss some of the main differences between GAAP and IFRS when it comes to our long-term assets. Remember, GAAP—these are the rules in the US, right? Generally Accepted Accounting Principles, set by the Financial Accounting Standards Board, and they create GAAP here in the US. These are the rules we focus on when we're taking this course, but internationally, we've got the International Accounting Board creating IFRS, the International Financial Reporting Standards. For the most part, they're very similar, but we've got some differences as well. Let's go ahead and talk about long-lived assets here.

So, similarities, let's go through these first. The definitions are generally the same, right? We're going to have our property, plant, and our equipment, which includes our land, land improvements, buildings. And then we have intangibles as well, right? Property, plant, and equipment, and intangibles, like patents, have the same basic definitions here. When we acquire, in GAAP and IFRS, we always use our historical cost principle. IFRS has some more leniency later on when we're subsequently valuing stuff, but always on the date of acquisition, we're using our historical cost principle. We talked about construction. We talked about it briefly when we were discussing the initial cost of a long-lived asset. And if you're constructing, say, a building, you could capitalize some of the interest. So, some of the cost of interest could go into the value of the building as well, if needed when you were creating the building, constructing it. That can happen under GAAP and IFRS; they have similar rules there. We don't really get too deep into the details in this class, but that is a similarity.

Next, we have ordinary repairs versus capital improvements. Remember, ordinary repairs, we just expense those, while capital improvements get capitalized into the account as an asset when we make a big change to the asset. That's the same as well. For the most part, we've got the same depreciation methods. When we talked about straight-line, double declining, units of activity, that's going to be the same. And when we have a change in method used, that methodology we talked about, that's the same as well. So, you can see there are a lot of similarities, but we're going to have quite a few differences over there as well.

So when we get rid of assets, the disposals, and talk about the gains on the sale, the losses on the sale, we account for those just the same as well. As well as our non-monetary exchanges. Say when we trade in an old truck for a new truck, or trading trucks, right, or trading assets in that sense without actually buying or selling a new one, well, we treat those rules pretty much the same as well.

Let's talk about some of the main differences. Well, in GAAP, we use the term salvage value when we're talking about the remaining value at the end of the useful life of an asset, whereas IFRS uses residual value. We tend to use all sorts of terms; you'll probably hear residual value used throughout this course as well. They get thrown around interchangeably quite often, so that's not a big deal there. And the big one here, we've talked about this before, is the revaluation. IFRS allows subsequent revaluation to fair value. So, if we bought something at the historical cost, remember when we, at the date of acquisition, we had our historical cost principle over here, so we bought an asset for $100,000, we record it at $100,000. But IFRS lets you change that value later on. If you want to adopt a fair value principle, it allows you to change it to the market value. So, if the value has gone up or down, you can adjust that value on your balance sheet. Okay? And this is allowed for PPE and intangibles. GAAP does not allow you to do this subsequent revaluation, and this is one of the biggest differences between GAAP and IFRS—the use of the fair value principle on our long-lived assets, okay? IFRS also uses what we call component depreciation. So, if you have one asset that might have different useful lives within that asset, maybe one part has a 5-year useful life and another part, a 10-year useful life, well, you would use component depreciation and depreciate each component separately. GAAP doesn't have any specific rules about component depreciation, and we don't really get into those details in this course.

Lastly, we have the capitalization of R&D costs. So, remember when we talked about research and development costs, well, when we talk about them from a GAAP standard, they're always expensed. We always expense them, but IFRS allows you to capitalize, which means turn into an asset, some of those costs once you reach the development phase of the asset, okay? So you research and now you find that it's technologically feasible that, hey, we are going to be able to actually create this product, now you reach the development stage, well, you start being able to capitalize those costs. Again, these are issues that are pretty much beyond the scope of this class, but it's nice to be at least exposed to these differences between GAAP and IFRs, okay?

So that's about it when it comes to long-lived assets. Let’s go ahead and move on to the next video.

Here’s what students ask on this topic:

What are the main differences between GAAP and IFRS in accounting for long-lived assets?

The main differences between GAAP and IFRS in accounting for long-lived assets include the following:

• Terminology: GAAP uses the term 'salvage value,' while IFRS uses 'residual value.'
• Revaluation: IFRS allows for the revaluation of assets to fair value, whereas GAAP prohibits this practice.
• Component Depreciation: IFRS requires component depreciation, where different parts of an asset with varying useful lives are depreciated separately. GAAP does not have specific rules for this.
• R&D Costs: Under GAAP, research and development costs are expensed as incurred. IFRS allows capitalization of development costs once technological feasibility is established.

How does IFRS handle the revaluation of long-lived assets compared to GAAP?

Under IFRS, companies are allowed to revalue long-lived assets to their fair value after initial recognition. This means that if the market value of an asset increases or decreases, the company can adjust the asset's value on the balance sheet accordingly. This revaluation can be applied to both property, plant, and equipment (PPE) and intangibles. In contrast, GAAP does not permit revaluation after the initial recognition; assets must remain recorded at their historical cost, minus accumulated depreciation and impairment losses.

What is component depreciation, and how is it treated differently under GAAP and IFRS?

Component depreciation involves depreciating different parts of a single asset separately if they have different useful lives. Under IFRS, this practice is required, meaning each component of an asset is depreciated based on its own useful life. For example, a building's roof might be depreciated over 20 years, while the structure itself might be depreciated over 50 years. GAAP does not have specific rules for component depreciation, and typically, the entire asset is depreciated as a whole.

How do GAAP and IFRS differ in the treatment of research and development (R&D) costs?

Under GAAP, all research and development (R&D) costs are expensed as incurred. This means that these costs are immediately recognized as expenses on the income statement. In contrast, IFRS allows for the capitalization of development costs once technological feasibility is established. This means that after reaching the development phase, costs can be recorded as an asset on the balance sheet and amortized over the useful life of the developed product.

What are the similarities between GAAP and IFRS in accounting for long-lived assets?

GAAP and IFRS share several similarities in accounting for long-lived assets. Both frameworks define long-lived assets similarly, including property, plant, and equipment (PPE) and intangibles. They both use the historical cost principle for initial acquisition. Additionally, both allow for the capitalization of interest costs during the construction of an asset and have similar rules for ordinary repairs versus capital improvements. Depreciation methods like straight-line, double-declining, and units of activity are also consistent between the two standards.