- 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:
- US GAAP (the United States Generally Accepted Accounting Principles) created by the Financial Accounting Standards Board (FASB).
- 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. |
- 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 |
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:
Cash flow from Investing Activity:
Cash flow from Financing Activity:
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
- 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
- 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
- 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
- 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
- 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.
