How do I prepare income statements, balance sheets, and cash flow statements according to IFRS and US GAAP?

This post explains how to make income statement balance and cash flow templates & reports according to IFRS (International Financial Reporting Standards) and US GAAP (Generally Accepted Accounting Principles). Both frameworks intend to reflect the financial information correctly, but varying presentation, measurement and recognition criteria are there. The following are the opportunities under each with which you can prepare these statements:

1. The Income Statement

IFRS Requirements

1. Nature-based presentation (cost of sales method): UK GAAP requires that all expenses must be analysed between their nature (eg depreciation, salaries etc…) whilst IFRS permits a choice between functional and nature classification.

2. Line items: IFRS prescribes that certain line items must be represented: revenue, finance costs (interest), tax expense, profit or loss and any adjusting due to reclassification/discontinued operation.

3. Order of Presentation: There is flexibility in the order of items, so long as they are clearly presented.

4. Comprehensive Income: IFRS requires a statement of comprehensive income that combines profit or loss with other comprehensive income, such as unrealized gains/losses on investments or foreign currency adjustments.

US GAAP Requirements
 

1. Classification: Typically, expenses are presented by function, distinguishing between cost of goods sold, administrative, and other operational costs.

2. Line Items: US GAAP is less prescriptive but generally follows a similar order to IFRS, with revenue, operating expenses, non-operating income, taxes, and net income.

3. Comprehensive Income: Like IFRS, US GAAP requires presenting comprehensive income, though it allows a separate statement for other comprehensive income instead of including it with the income statemen

 

Steps to Prepare:

1. Accrue Revenues and Expenses: Recognize revenues and match expenses under both standards.

2. Calculate Gross Profit, Operating Profit, and Net Profit: IFRS allows flexibility in reporting either as a single step or multiple-step income statement, whereas US GAAP often uses a multiple-step format.

3. Record Other Comprehensive Income: This could include gains or losses from foreign currency, unrealized gains, and pension adjustments.

 

2. Preparing the Balance Sheet

IFRS Requirements

 

1. Current and Non-Current Classification: Assets and liabilities are classified as either current or non-current. IFRS allows for presenting these classifications in reverse order.

2. Equity Section: Share capital, reserves, and retained earnings are required in the equity section.

3. Measurement: Assets like inventory and property, plant, and equipment (PPE) can be revalued (fair value or revaluation model) as long as it’s consistently applied.

4. Disclosure of Items: Specific disclosure of items like investment property, biological assets, and intangibles is necessary.

 

US GAAP Requirements

1. Current and Non-Current Classification: Required similar to IFRS; however, there is no option to reverse the order.

2. Equity Section: Similar to IFRS but with additional specific disclosure requirements for items such as treasury stock and additional paid-in capital.

3. Measurement: Revaluation for PPE and intangibles is not allowed under GAAP. Inventory is usually recorded at the lower of cost or market.

4. Disclosure of Items: US GAAP is stricter in certain aspects of disclosure, especially regarding contingent liabilities and commitments.

 

Steps to Prepare:

1. Organize Assets, Liabilities, and Equity: Separate these into current and non-current categories.

2. Measure Assets and Liabilities: Use fair value or historical cost as required.

3. Summarize Equity Components: Ensure consistency in items like retained earnings, other comprehensive income, and capital contributions.

3. Preparing the Cash Flow Statement
 

IFRS Requirements

1. Cash Flow Format: Direct or indirect method is allowed for operating activities, with a preference for the direct method.

2. Classification: Cash flows are divided into operating, investing, and financing activities.

3. Interest and Dividends: IFRS allows flexibility, permitting classification as either operating, investing, or financing activities based on company preference.

4. Bank Overdrafts: Considered part of cash equivalents if they are an integral part of a company’s cash management.

US GAAP Requirements

1. Cash Flow Format: The indirect method is generally preferred for operating activities, although the direct method is permitted.

2. Classification: Like IFRS, cash flows are separated into operating, investing, and financing activities.

2. Interest and Dividends: US GAAP specifies that interest paid and received, as well as dividends received, must be classified as operating activities, whereas dividends paid are financing activities.

3. Bank Overdrafts: Treated as financing activities, not part of cash equivalents.

Steps to Prepare:

1. Classify Cash Flows: Divide cash flows into operating, investing, and financing sections.

2. Choose Method for Operating Activities: Use the direct or indirect method depending on requirements.

3. Handle Non-Cash Adjustments: Adjust for items like depreciation, changes in working capital, and foreign exchange gains/losses.