IFRS vs US GAAP (Cash Flow Statement)

  • Accounting Standard is a set of protocols created to maintain a homogeneous standard around the Globe for reporting and presenting the Financial Reports of a company.
  • A uniform standard works a common platform to compare companies, the absence of which will create confusion in the industries globally. Example: In the absence of an Accounting Standard, few companies would publish results annually and some in 5 years making it difficult to compare the companies.
  • There are many Accounting Standards globally, but the following two are the most common:
    1. US GAAP (the United States Generally Accepted Accounting Principles) created by the Financial Accounting Standards Board (FASB).
    2. IFRS (International Financial Reporting Standards) created by the International Accounting Standards Board (IASB).
  • The main difference between the US GAAP and IFRS is the fact that GAAP is rule-based where there are several rules for all cases and IFRS is Principle-based, where a principle controls several standards.
  • Out of the above two, IFRS is commonly accepted globally but US GAAP is mandatory for a company listed in the United States. Both the standards differ in various ideologies, let us look at the differences between the two in cash flow statements:
Basis of Distinction GAAP IFRS
Interest Paid Classified as Operating Activity Classified as Operating or Financing Activity
Interest Received Classified as Operating Activity Classified as Operating or Investing Activity
Dividend Paid Classified as Financing Activity Classified as Operating or Financing Activity
Dividend Received Classified as Operating Activity Classified as Operating or Investing Activity
Taxes Paid Classified as Operating Activity Classified as Operating or Financing or Investing Activity.
Let us understand the above terms,
  • If a company is a financial enterprise, then Interest/Dividend Paid and received are clearly Operating Activities, however, in other types of company, it is more of a financing activity (interest paid) or investment activity (interest received). IFRS allows both types of classification in this regard, whereas UA GAAP considers it as Operating Activity Only.
  • Income tax or tax on profit can be considered as an Operating Activity, but if the tax is pertaining to financing or investing activity the tax can also be considered as financing or investing activity. IFRS allows both types of classification in this regard, whereas UA GAAP considers it as Operating Activity Only.

IFRS vs US GAAP (Cash Flow Statement)

  • We have studied how to make cash flow statements and the difference between the cash flow statement of IFRS and US GAAP, let us now create a Cash Flow Statement for each and understand the difference.

Example explaining the difference between IFRS and US GAAP

Few details from the annual statement of M/S XYZ Ltd. are available with us, let us create its Cash Flow Statement in both IFRS and US GAAP to understand the difference between them.
Particulars 2015 2016
Revenue from Operations 400000.00 500000.00
Cost of Raw Material 100000.00 110000.00
Income Tax 21000.00 18000.00
Machinery 400000.00 250000.00
Plant and Equipment 350000.00 500000.00
Interest Received 225000.00 200000.00
Long Term Debt Interest Repayment 700000.00 600000.00
Dividend Payment 400000.00 450000.00
LTCG Tax 180000.00 255000.00
Solution:
Let us bifurcate the above details in types of activities as per IFRS and US GAAP.
Particulars US GAAP IFRS
Revenue from Operations Operating Operating
Cost of Raw Material Operating Operating
Income tax Operating Operating
Machinery Investing Investing
Plant and Equipment Investing Investing
Interest received Operating Investing
Long Term Debt Interest Payment Operating Financing
Dividend Payment Financing Financing
LTCG Tax Operating Financing

IFRS

Cash flow from Operating Activity:
  • Revenue from Operations has increased in 2016 as compared to 2015, hence it is an inflow of Rs. 100000.00
  • Raw Materials has increased in 2016 as compared to 2015, hence it is an outflow of Rs. 10000.00
  • Income tax has decreased in 2016 as compared to 2015, hence it is an inflow of Rs. 3000.00

Cash flow from Investing Activity:
  • Machinery has decreased in 2016 as compared to 2015, hence it is an inflow of Rs. 150000.00
  • Plant and Equipment have increased in 2016 as compared to 2015, hence it is an outflow of Rs. 150000.00
  • Interest Received decreased in 2016 as compared to 2015, hence it is an outflow of Rs. 25000.00

Cash flow from Financing Activity:
  • Long Term Debt Interest Repayment has decreased in 2016 as compared to 2015, hence it is an inflow of Rs. 100000.00
  • Dividend Payment has increased in 2016 as compared to 2015, hence it is an outflow of Rs. 50000.00
  • LTCG Tax has increased in 2016 as compared to 2015, hence it is an outflow of Rs. 75000.00

US GAAP

Cash flow from Operating Activity:
  • Revenue from Operations has increased in 2016 as compared to 2015, hence it is an inflow of Rs. 100000.00
  • Raw Materials has increased in 2016 as compared to 2015, hence it is an outflow of Rs. 10000.00
  • Income tax has decreased in 2016 as compared to 2015, hence it is an inflow of Rs. 3000.00
  • Interest Received decreased in 2016 as compared to 2015, hence it is an outflow of Rs. 25000.00
  • Long Term Debt Interest Repayment has decreased in 2016 as compared to 2015, hence it is an inflow of Rs. 100000.00
  • LTCG Tax has increased in 2016 as compared to 2015, hence it is an outflow of Rs. 75000.00 

Cash flow from Investing Activity:
  • Machinery has decreased in 2016 as compared to 2015, hence it is an inflow of Rs. 150000.00
  • Plant and Equipment have increased in 2016 as compared to 2015, hence it is an outflow of Rs. 150000.00

Cash flow from Financing Activity:
  • Dividend Payment has increased in 2016 as compared to 2015, hence it is an outflow of Rs. 50000.00

Cash Flow Statement in IFRS

Particulars Amount (Rs.)
Operating Activities
Revenue from Operations 100000.00
Cost of Raw Material (10000.00)
Income Tax 3000.00
Net Cash Flow from Operating Activity 93000.00
Investing Activities
Machinery 150000.00
Plant and Equipment (150000.00)
Interest Received (25000.00)
Net Cash Flow from Investing Activity (25000.00)
Financing Activities
Long Term Debt Interest Repayment 100000.00
Dividend Payment (50000.00)
LTCG Tax (75000.00)
Net Cash Flow from Financing Activity (25000.00)
Net Cash Flow from all Activities 43000.00

Cash Flow Statement in US GAAP

Particulars Amount (Rs.)
Operating Activities
Revenue from Operations 100000.00
Cost of Raw Material (10000.00)
Income Tax 3000.00
Interest Received (25000.00)
Long Term Debt Interest Repayment 100000.00
LTCG Tax (75000.00)
Net Cash Flow from Operating Activity 93000.00
Investing Activities
Machinery 150000.00
Plant and Equipment (150000.00)
Net Cash Flow from Investing Activity 0.00
Financing Activities
Dividend Payment (50000.00)
Net Cash Flow from Financing Activity (50000.00)
Net Cash Flow from all Activities 43000.00

IFRS vs US GAAP - Observations

  • The major difference lies in the classification of activities as Operating, Investing, or Financing.
  • Both the standards support Direct as well as Indirect method of Calculating Cash Flow of Operating Activities.
  • The net Cash Flow Statement of the company remains the same.
  • IFRS vs GAAP can bring a major change in the Cash Flow of Activities. In the above example, Cash Flow from Investing Activities becomes Zero in the case of US GAAP and totals to (25000) in the case of IFRS.
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