IFRS Section: definition of fair value, one of the differences between U.S. GAAP and IFRS.

• Author: Heffes, Ellen M.
• Position: International financial reporting standards

There are many areas of difference between generally accepted accounting principles and International Financial Reporting Standards, which both the U.S. Financial Accounting Standards Board and International Accounting Standards Board are working on to converge.

One area where significant differences still exist is fair value. This issue's IFRS Section, takes a look at some of those differences.

In looking only at issues involving fair value, there are several areas within IFRS where the fair-value concepts directly challenge established U.S. GAAP as well as U. S. law and Internal Revenue Service regulations. None of these problems are insuperable, but a clear understanding of how valuation information will change under IFRS is essential.

In the following, Alfred King explores those differences. King is a vice chairman at Marshall & Stevens, one of the nation's largest full-service valuation firms.

--IFRS Section co-developers Cheryl de Mesa Graziano and Ellen M. Heffes

GAAP vs IFRS: WILL THE REAL FAIR VALUE PLEASE STAND UP?

By Alfred M. King

The following highlights some of the most salient areas of difference between U.S. GAAP and IFRS to assist financial executives in anticipating some of the problems they may encounter in a prospective switch.

UFO is Prohibited

While not the most important conceptually, perhaps the stickiest problem deals with last-in, first-out (UFO) accounting. Simply put, under IFRS, companies are prohibited from using LIFO. But under United States law, U.S. companies must use LIFO in their published and audited financial statements to obtain the tax benefits of LIFO.

Consequently, adoption of IFRS would cause all current LIFO reserves--amounting to billions of dollars--to immediately become taxable income. This alone represents a prohibitive cost barrier.

The Financial Accounting Standards Board and the U.S. Securities and Exchange Commission are fully aware of this problem and are taking steps to mitigate it. One suggestion would be for Congress to change the tax law and permit use of LIFO for taxes and repeal the conformity requirement. Given the need for tax revenue, however, a more likely scenario would be a 10-year transition.

On a present-value basis, this would mitigate but not eliminate the problem. No matter how any LIFO spread is handled, companies currently using LIFO will likely have a significant out-of-pocket cash cost on adopting IFRS.

Even 'Fair Value' Definition Differs When FASB issued its Financial Accounting Standard No. 157, Fair Value Measurements, it introduced a unique definition of fair value, in part, to distinguish it from the more common fair-market value definition. (FEI wrote to FASB, before issuance of SFAS 157 regarding the new definition.)

The new definition of fair value differs from fair-market value in two critical areas. First, rather than dealing with an exchange between a "willing buyer and willing seller," as used in the fair-market value definition...