GAAP versus IFRS Treatment of Intangible Assets

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GAAPversus IFRS: Treatment of Intangible Assets

GAAPversus IFRS: Treatment of Intangible Assets

TheInternational Financial Reporting Standards (IFRS) and the U.SGenerally Accepted Accounting Principles were developed to guideaccountants when preparing the financial statements. However, the twosets of accounting standards and principles differ in many ways. Inmost cases, IFRS differs from GAAS because the provisions of the IFRSwere formulated with the key objective of correcting weaknesses thatwere discovered in the previous accounting rules, including the GAAP(RSM International, 2015). The treatment of different goodwill andseveral other intangible assets are some of the key areas in whichGAAP and IFRS differ. Under ISA 38, intangible assets are defined asthose assets that lack the physical substance, but have monetaryvalue (Deloitte Global Service, 2014). This paper will focus on thedifferences existing between the U.S. GAAP and IFRS in terms of thetreatment of intangible assets that are internally developed,impairment of software, revaluation of intangible assets, test levelfor impairment of goodwill, and the allocation of impairment.

Recognitionof intangible assets that are internally developed

Boththe U.S. GAAP and IFRS support the recognition of intangible assetsthat are internally developed, but they use different criteria. ASC350-20 of the GAAP holds that the cost of developing, restoring, ormaintaining intangible assets that are developed internally and haveindeterminate lives should be recognized as an incurred expense incase it cannot be specifically identified, indeterminable life, andrelates to an entity even if it is associated with a non-profitactivity (Deloitte, 2015). Software that has been developed for leaseor for sale is exempted from this rule. Under IFRS, costs associatedwith intangible assets that are developed internally are recognizedas expenses in case they meet two major conditions. First, it shouldbe probable that all economic potential benefits that are associatedwith the intangible assets will flow into the organization (Deloitte,2015). Secondly, it should be practically possible to recognize thecost of all intangible assets. It is evident that GAAP allowsrecognition of costs of intangible assets that related to non-profitactivities, while IFRS requires such assets to generate benefits thatflow directly into the entity.

Impairmentof software to be leased or sold

Thecost of developing some software that is meant for lease or for saleis usually exempted under the U.S. GAAP, but the same rules providefor the recognition of impairment of such software. The GAAP holdsthat the any amount in the excess of the realizable value should bewritten off at each balance sheet date (PricewaterhouseCoopers,2014). The determination of the realizable value of the softwareshould not make use of discounted cash flows. Similarly, IFRSrequires testing of impairment of all intangible assets to beperformed annually. However, IFRS allows accountants to utilize thepresent value of the software’s future cash flows when determiningits realizable value.

Revaluationof intangible assets

GAAPand IFRS have different provisions to revaluation of intangibleassets. The U.S. GAAP holds that intangible assets can be givenrecognition at the first time, but any revaluation after the firstrecognition is prohibited (RSM International, 2015). In addition,GAAP requires accountants to carry intangible assets using thehistorical cost value, less their impairment and amortization. TheIFRS requires intangible assets to be accounted for using the costmodel, which also holds that impairment and amortization should bededucted. However, the main difference is that IFRS allows accountsto revalue intangible assets in the subsequent periods using therevaluation model, unlike the users of the U.S. GAAP who cannotrevalue these assets under any circumstance.

Testlevels of testing for impairment of goodwill and the rest ofintangible assets

Boththe GAAP and IFRS allow for testing of goodwill, but at differentlevels. Under the U.S. GAAP, organizations can only test for goodwillat one level below the current operating unit(PricewaterhouseCoopers, 2014). The IFRS does not have a directstatement on the level at which goodwill should be tested, butsection ISA 36 paragraph 80 provides that goodwill should be testedby the operating segment (Deloitte, 2015). This implies that goodwillshould only be tested at the level of the cash generating o theoperating unit. The position held by the framers of the IFRS is basedon the idea that most of intangible assets (including the goodwill)do not generate revenue as standalone assets, which makes itdifficult to calculate the value of benefits obtained from suchassets (PricewaterhouseCoopers, 2014). This makes it necessary to usethe smallest possible group of intangible assets that areidentifiable and are capable of generating cash as a group andindependent of other assets. Therefore, IFRS provision on the levelof testing for the impairment of the organization’s goodwill is acorrection of weaknesses of GAAP. However, the two accountingguidelines require the testing of impairment to be done annually orwithin the financial period in case circumstances indicating thepossibility of the occurrence of impairment are discovered.

Processof allocating goodwill impairment

TheU.S. GAAP recommends the use of two steps when allocating impairmentof goodwill. The first step involves the comparison of the carryingamount and the fair value of a reporting unit(PricewaterhouseCoopers, 2014). An accountant proceeds to the secondstep if the outcome of the first step indicates that the fair valuerecorded by the reporting unit exceeds the carrying amount. In thesecond step, accountants aim at determining the amount of lossassociated with impairment of goodwill. In this step, the carryingamount is compared to an implied fair value that has been recorded bythe reporting unit. An amount equal to the excess of the carryingvalue is recognized as the goodwill impairment. The IFRS recommendsthe use of a single step when allocating impairment of goodwill. Thisinvolves the comparison of the carrying amount with the recoverableamount. The excess of the carrying amount is recognized as animpairment loss and allocated first to goodwill, then to the rest ofthe assets of the reporting unit using a pro rata basis up to anextent that the loss exceeds the carrying value of the organization’sgoodwill (PricewaterhouseCoopers, 2014). Therefore, apart from theuse of a different number of steps, the actual allocation of animpairment loss is slightly different.


TheU.S. GAAP and IFRS are useful guidelines that help accountants whenpreparing the financial reports for their entities. However, the twohelp accountants see the accounting processes from varyingperspectives. For example, accountants who use GAAP are allowed torecognize the cost of intangible assets that are used in non-profitoperations, but only the cost of assets with cash flow benefitsflowing into a given entity are recognized under IFRS. In addition,unlike the GAAP, IFRS allow accountants to make use of the presentvalue of the software’s future cash flows to determine therealizable value of software. Moreover, unlike the GAAP, IFRS allowentities to revalue their intangible assets after their initialrecognition. GAAP allows entities to test for impairment to at mostone level after their reporting unit, but only the reporting unit cantest for impairment under the IFRS. Additionally, GAAP requiresaccounts to use two steps when allocating impairment of a group ofintangible assets while IFRS provides a single step.


DeloitteGlobal Service (2014). ISA 38: Intangible assets. Deloitte.Retrieved December 9, 215, from

DeloitteGlobal Service (2015). Goodwill and other intangible assets: Keydifferences between U.S. GAAP, and IFRS. Deloitte.Retrieved December 9, 2015, from

PricewaterhouseCoopers(2014). IFRSand U.S. GAAP: Similarities and differences.New York, NY: PricewaterhouseCoopers.

RSMInternational (2015). U.S.GAAP versus IFRS: Intangible assets other than goodwill at a glance.London: RSM International.

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