What’s the Big Difference Between US GAAP and IFRS?

A preview to the case study on US GAAP vs IFRS financial reporting. For CNH Industrial, the most substantial difference is in the D of research and development expenses. This impacts all three financial statements: income statement, balance sheet, and cash flow statement. In my view, the second largest difference is in the way operating leases are presented in the cash flow statement.
Several less substantial differences occur in the areas of goodwill, pension, restructuring, and income tax. Each of the financial statements also has some cosmetic differences between US GAAP and IFRS.

⏱️TIMESTAMPS⏱️
00:00 US GAAP vs IFRS case study
01:31 Income statement US GAAP vs IFRS
02:54 Development costs US GAAP vs IFRS
05:56 Goodwill US GAAP vs IFRS
06:50 Pensions US GAAP vs IFRS
07:04 Restructuring US GAAP vs IFRS
07:25 Income tax US GAAP vs IFRS
07:46 Cosmetic differences income statement
08:40 Balance sheet US GAAP vs IFRS
10:47 Cosmetic differences balance sheet
11:21 Cash flow statement US GAAP vs IFRS
13:51 US GAAP vs IFRS summary

Let’s start with putting the CNH income statements side by side. US GAAP on the left. IFRS on the right. Top line (net revenues) side by side. Net income side by side.

Revenue in 2024 was $19.8B in US GAAP, and $19.7B in IFRS. Net sales, or revenues from sales of goods and services, is the same in both: $17.1B. The difference in revenue between US GAAP and IFRS is in the line “finance, interest and other income”.

What about the bottom line? Net income, or profit for the period. 2024 IFRS Net Income is 10% lower than US GAAP Net Income.

Let’s use the reconciliation of profit, provided by CNH, to understand the differences. IFRS profit at the top, US GAAP profit at the bottom, and the adjustments in the middle.

First item on this list is development costs. It might not look very big, 15 million dollars on total profit in excess of a billion dollars, but on a cumulative (history-to-date) basis it is huge, as we will see when we put the balance sheets side by side.

What is different in the treatment of development costs? Narrative first, then a detailed look at the CNH R&D cost numbers.
Under EU-IFRS, costs relating to development projects are recognized as intangible assets when costs can be measured reliably, and the technical feasibility of the product, volumes and pricing support the view that the development expenditure will generate future economic benefits.
Under U.S. GAAP, development costs are expensed as incurred.

Other adjustments is a line that mainly includes three items.
One. Goodwill and other intangible assets.
Two. Defined benefit plans, or pension accounting.
Three. Restructuring provisions.
The difference in treatment of development costs, as well as the other adjustments, lead to a tax impact, and on top of that there are differences arising in the accounting for deferred tax assets and liabilities.

CNH balance sheets side by side, in the form of the accounting equation: assets equal liabilities plus equity.
US GAAP: assets of $42.9B equal liabilities of $35.2B plus equity of $7.7B.
IFRS: assets of $43.6B equal liabilities of $35.2B plus equity of $8.4B.
2024 year end IFRS assets are 2% higher than US GAAP assets. 2024 year end IFRS Equity is 8% higher than US GAAP Equity.
The development costs that we previously encountered in the income statement comparison are the main reason for this. For 2024 the difference was just 15 million dollars, but on a cumulative, history-to-date, basis it’s more than 800 million dollars.

CNH cash flow statements side by side, on a very high level. The big presentational, or cosmetic, difference, is that the CNH US GAAP cash flow statement has a separate line item for “Expenditures for assets under operating leases” of $650MM in cash outflow from investing activities. The US GAAP cash from operating activities section has multiple separate line items related to operating leases. While under IFRS…. Cash from operating lease is recognized under operating activities in a single line item. In terms of amount, the #USGAAPversusIFRS cash flow statement difference looks like a very big deal, but it turns out to be… just a matter of the way things are presented!

Philip de Vroe (The Finance Storyteller) aims to make #accounting , finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, livestreams, classroom sessions, and webinars. Connect with me through Linked In!

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