US GAAP vs. IFRS in M&A accounting: Understanding key differences and financial statement impact
Rudy Leemans
by Rudy Leemans
Mergers and acquisitions (M&A) are among the most complex transactions in corporate finance, often reshaping entire industries. For accountants, the challenge lies not only in valuing the acquired business, but in ensuring the transaction is presented fairly in financial statements. While both the US Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) require the purchase method, or acquisition method, for business combinations, the detailed rules diverge in ways that significantly affect reported earnings, balance sheet composition, and investor perceptions. For executives and investors navigating M&A, understanding these distinctions is critical for interpreting post-deal performance and making informed decisions.
Identifying the acquirerBoth frameworks require identifying which party gains control, but differ in their definition.
Under US GAAP, the party that gets more than 50% of the voting rights is considered the acquirer.
IFRS takes a bit more of a substance-over-form approach. Even if an entity doesn’t technically have 50% of the voting rights, they may still be deemed the acquirer because they have a controlling interest.
Recognition of acquired assets and liabilities
Both frameworks require recognition of the acquiree’s assets and liabilities at fair value on the acquisition date.
US GAAP is rules-based and more prescriptive, often specifying how to measure certain asset classes, like contingencies, deferred tax, and even certain intangible assets such as customer relationships/client lists.
IFRS still requires fair value measurement but is principle-based and allows more judgment, particularly for uncertain future obligations and provisions.
Impact: Under IFRS, acquirers may recognise liabilities sooner than under GAAP, affecting post-deal expenses and profit margins.
Goodwill and bargain purchases
US GAAP: Any excess purchase price over fair value of net assets is recognised as goodwill.
IFRS: Similar goodwill treatment, but bargain purchases are recognised directly in profit or loss after reassessment of fair values.
Impact: Both inflate the balance sheet through goodwill, but bargain purchase gains may be more prevalent under IFRS, resulting in less intangible asset recognition than US GAAP, and more goodwill goes on the balance sheet.
Treatment of acquisition costs
US GAAP: Direct transaction costs are expensed immediately, and costs related to issuing equity or debt are capitalised.
IFRS: Similar expensing rule, but with less detailed guidance, and equity issuance costs are directly booked to equity, not as a deduction or negative value as in US GAAP.
Impact: Neither framework permits capitalisation of deal fees, leading to front-loaded expenses.
Contingent consideration
US GAAP: Recorded at fair value on day one, subsequent changes are recognised in earnings.
IFRS: Also fair value at inception, but subsequent changes may run through profit/loss or equity, depending on the timing.
Impact: GAAP income statements may be more volatile; IFRS allows more flexibility.
Non-controlling interests
US GAAP: Requires non-controlling interest (NCI) to be measured at fair value or the proportionate share of net assets.
IFRS: Provides the same choice, fair value, or proportionate share of net assets (partial goodwill), but requires a choice of one method for each business combination, which must be disclosed.
Impact: IFRS often leads to lower goodwill, higher post-acquisition return on equity (ROE), and post-acquisition profits and impairments looking different depending on the chosen method.
Intangible assets recognition
US GAAP: More prescriptive, leading to broader recognition of intangibles.
IFRS: Requires recognition only if future economic benefits are probable and measurable.
Impact: GAAP acquirers often record more amortisable intangibles, affecting earnings.
Subsequent testing: Goodwill impairment
US GAAP: Annual impairment test at the reporting unit level, no amortisation.
IFRS: Annual impairment at cash-generating unit level, no amortisation.
Note: under US GAAP, asset impairment is final. Under IFRS, reversal of asset impairment is allowed.
Impact: IFRS may trigger impairments earlier, increasing volatility.
Step acquisitions and loss of control
US GAAP: Step acquisitions remeasure previously held equity interests at fair value, gains/losses in earnings.
IFRS: Very similar, though IFRS emphasises revaluation through profit or loss.
Impact: Both create earnings swings, but IFRS may accelerate recognition.
Broader financial statement implications
GAAP often results in higher volatility from contingent consideration revaluations and more intangible amortisation.
IFRS tends to produce smoother results, though impairments can cause large one-time hits.
The IFRS partial goodwill option, and narrower intangible recognition yield leaner balance sheets, while GAAP shows larger goodwill.
View here a quick reference graph.
GCG member firm SeatonHill PartnersFort Worth, TX, USAT: +1 262 215 0945Advisory
Rudy Leemans is a CFO partner on the Midwest team of Seaton Hill. He is a versatile international corporate finance executive, successful at building solid business practices while driving economic stability, growth, and revenue. Rudy has demonstrated success in leading finance teams, leveraging his dynamic leadership skills and diverse industry knowledge. Contact Rudy.
SeatonHill specialises in guiding companies through complex business environments. With over 90 seasoned CFOs nationwide, boasting expertise in over 200 industries, we can assist with compliance, strategic planning, and financial modelling. Our fractional and interim CFOs offer tailored solutions to drive growth, overcome challenges, and deliver bottom-line results.
