US GAAP – An introduction 

US GAAP – it has a fearsome reputation as something that is too hard to do for mere mortals.  But is that fair?  Hello, I am Iain Alexander from KPMG’s US Accounting and Reporting Group based in London,  and I am going to give a quick summary of how US GAAP compares with IFRS, and what the big differences are for technology companies, and in this summary I will briefly talk about where to find US GAAP, the similarities and differences to IFRS, how to work out what it means for you and what the future developments are.

Now, if you are watching this session, it is probably because you are either considering reporting under US GAAP, or you have already taken that decision and so now need to get to grips with it. 

One place to start is by going and taking a look at US GAAP.  You can find it through the FASB (that’s the Financial Accounting Standards Board) website, or through services provided by your accountants and financial advisers. 

One concern used to be having to know where all the US guidance was – at least it is now mostly in one place (the ‘Accounting Standards Codification or ASC’), but there are still further GAAP implementation issues that are a matter of accepted practice, such as for recognising sales revenue or for debt factoring, where the accounting may need to be supported by external evidence, and you need to be aware of these.

Turning to similarities and differences, how big a deal is it going to be to account and report under US GAAP?  In my view “It Depends” is probably the best answer. 

Which is typical accountant’s answer, I know, but while our experience has been that with the exception of revenue recognition and capitalisation of development costs, changing to US GAAP isn’t always a huge issue for most technology companies, there are so many areas of difference, it does require a lot of thought and often a lot of work to establish that all the differences have been identified. 

Annually, we publish a guide of the differences between IFRS and US GAAP [cut to slide], which continues to have a long list of differences despite efforts to bring the standards together, but in many cases the differences apply only in very specific circumstances, so how extensive those are will depend on the nature and complexity of your business.

US GAAP is conceptually very similar to IFRS (and to UK GAAP if that is relevant to you).  US GAAP uses prepayment and accrual accounting, recognises revenue when a service or delivery has been performed, accounts for  assets (tangible and intangible) and liabilities, and has the same basic idea of shareholders’ equity.  Where US GAAP really differs is in the extent of the available guidance around those things and the very limited ‘choices’ for accounting policies. 

This has both advantages and disadvantages – for example, with guidance that is more prescriptive about what to do, you can often reach an answer with more certainty and in many but not all cases, there is guidance that is specific for industries.  However, non-US companies can find the rules too binding. 

When it comes to working out what it means for you, what you really need to do is start by comparing what you actually do to what US GAAP says you must do.  There are significant areas of overlap between US GAAP, IFRS and UK GAAP, but quite likely to be differences in respect of:

·         Recognising sales revenue

·         Capitalisation of software development costs (where relevant)

These first two are common for technology businesses, but as for other types of company, what we also see are differences in:

·         Accounting for derivatives, and hedging (which is even more alien from private UK GAAP)

·         The decision as to whether something is a share, a borrowing, or a little of both

·         The use of a strictly defined ‘fair value’ which is different for UK GAAP, but not really for IFRS

·         Deferred tax

·         ‘First time adoption’ rules, which US GAAP does not have, requiring an historic application of GAAP

·         Accounting for buying a business 

·         Joint ventures, associates and similar arrangements, and what gets consolidated

·         Property leases (real estate, as it is called)

·         Debt factoring

I should say that is not a comprehensive list, but is does highlight where we typically see the main differences, for most types of business.  And in addition, the classification, presentation and disclosure of many items will be different.  The latter isn’t necessarily all more onerous though – UK GAAP and IFRS have comprehensive disclosures and classified balance sheets, for example.

Now let’s look ahead.  In recent years, the US GAAP and IFRS standard setters have tried to get their rules to line up – so we have new standards in development for leasing and revenue recognition, for example, but these look like they come into place in 2015.  There may well be practical differences even on these standards, and how close future standard developments will be depends on the boards (FASB and IASB) continuing to work together.

What this all means for you is that if you do need US GAAP numbers it is worth evaluating what your differences are.  This can be a time consuming exercise.  Outside help can be very useful – you can outsource the US GAAP work altogether - or you could have someone working with you, providing training, support and a sounding board for your own analysis.  But a key point has to be to build this in to your financial reporting systems and to plan enough time to make the change.

Thank you for listening.  Please look at the other videos we have posted for US GAAP, US IPOs and other topics.