Much of the world’s accounting education, commentary and software is written from a United States perspective, using US generally accepted accounting principles (US GAAP), codified by the Financial Accounting Standards Board. The course material on which this series draws is one example: it explains investments, control and business combinations using US standards such as ASC 321, ASC 323, ASC 805 and ASC 810.
Australia uses a different framework. Australian Accounting Standards, issued by the Australian Accounting Standards Board (AASB), are based on International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board. For-profit entities that comply with Australian Accounting Standards generally also comply with IFRS.
The two frameworks share many concepts, and for business combinations in particular they were developed together and are closely aligned. But there are differences that matter, especially for investments, control and goodwill. This article sets out the most important ones for the topics in this series, so that readers can translate US-based material into the Australian context. It is part of GoCore’s series on investments, groups and acquisitions.
A note of caution: this is a high-level summary, standards change over time, and specific situations need professional advice.
Where the standards are found
| Topic | US GAAP | Australian standards (IFRS equivalent) |
|---|---|---|
| Equity investments without significant influence | ASC 321 | AASB 9 (IFRS 9) |
| Associates and joint ventures | ASC 323 | AASB 128 (IAS 28) |
| Fair value option | ASC 825 | Limited; AASB 128 exemption for certain entities |
| Consolidation and control | ASC 810 | AASB 10 (IFRS 10) |
| Joint arrangements | Various | AASB 11 (IFRS 11) |
| Business combinations | ASC 805 | AASB 3 (IFRS 3) |
| Goodwill and impairment | ASC 350 | AASB 136 (IAS 36) |
| Fair value measurement | ASC 820 | AASB 13 (IFRS 13) |
| Disclosure of interests in other entities | Various | AASB 12 (IFRS 12) |
Small equity investments
US GAAP (ASC 321): equity securities without significant influence are generally measured at fair value through net income. Where fair value is not readily determinable, an investor may elect a measurement alternative: cost, less impairment, adjusted for observable price changes in orderly transactions for identical or similar securities of the same issuer.
Australian standards (AASB 9): equity investments are measured at fair value through profit or loss by default. An entity may make an irrevocable election, on initial recognition, to present fair value changes in other comprehensive income for equity investments not held for trading, with no later transfer of gains or losses to profit. There is no general measurement alternative at cost, though cost may be an appropriate estimate of fair value in limited circumstances.
Why it matters: an Australian company can keep fair value swings on strategic holdings out of profit through the election, which US GAAP does not allow; a US company can carry many private company shares at adjusted cost, which Australian standards do not generally allow. The article Small shareholdings covers this in detail.
Associates: equity method or fair value
US GAAP: an investor with significant influence may apply the equity method or elect the fair value option for the investment.
Australian standards: the equity method is generally required for associates and joint ventures. Only venture capital organisations, mutual funds, unit trusts and similar entities may instead measure such investments at fair value through profit or loss. As the source course notes, this is a meaningful difference: most Australian companies cannot simply choose fair value for associates.
Other detailed differences exist, for example in how losses beyond the investment are treated and in some aspects of changes in ownership. The article The equity method explained describes the Australian approach.
Control and consolidation
This is one of the most significant areas of difference.
US GAAP uses two models:
- the voting interest model, under which ownership of more than 50% of voting shares generally indicates a controlling financial interest
- the variable interest model, for variable interest entities whose voting rights do not identify who controls them, under which the primary beneficiary consolidates: the party with the power to direct the activities that most significantly affect the entity’s economic performance and the obligation to absorb losses or right to receive benefits that could be significant
Australian standards (AASB 10) use a single control model for all entities: an investor controls an investee if it has power over the relevant activities, exposure or rights to variable returns, and the ability to use its power to affect those returns.
Practical consequences:
- De facto control. Under Australian standards, an investor with less than half the votes can control an investee if its holding is large relative to dispersed other holders. Under the US voting interest model, a majority is generally required, so such entities may not be consolidated.
- Potential voting rights. Australian standards consider substantive potential voting rights, such as options, in assessing power.
- Special-purpose entities. The two frameworks analyse them differently, and conclusions can differ.
The article What control means explains both approaches.
Investment entities
Both frameworks allow certain investment entities to measure investments in controlled entities at fair value rather than consolidating them, but the criteria and details differ.
Business combinations
For business combinations, the frameworks are closely aligned, because the US and international standard-setters developed their standards jointly. Both use the acquisition method: identifiable assets and liabilities at fair value, acquisition-related costs expensed, goodwill recognised for the excess and bargain purchase gains recognised in profit.
Notable differences include:
Non-controlling interests. US GAAP requires non-controlling interests to be measured at fair value, producing “full goodwill”. Australian standards allow a choice, transaction by transaction, between fair value and the proportionate share of identifiable net assets.
The definition of a business. Both frameworks adopted closely matching definitions and tests. Under US GAAP, the concentration screen is a required first step. Under Australian standards, it is optional. The article Buying a business or buying assets? explains the test.
Contingent liabilities. The criteria for recognising contingent liabilities assumed in a business combination differ in detail.
In-process research and development in asset acquisitions. Under US GAAP, acquired in-process research and development in an asset acquisition is generally expensed if it has no alternative future use. Under Australian standards, separately acquired research and development projects can generally be recognised as intangible assets.
Goodwill after acquisition
Australian standards (AASB 136): goodwill is not amortised. It is allocated to cash-generating units and tested for impairment at least annually, by comparing each unit’s carrying amount with its recoverable amount, the higher of fair value less costs of disposal and value in use. Goodwill impairments are never reversed.
US GAAP (ASC 350): for public companies, goodwill is not amortised and is tested for impairment at least annually at the level of reporting units, comparing a unit’s fair value with its carrying amount. Private companies may elect an alternative to amortise goodwill, generally over ten years or less, with simplified impairment testing.
Why it matters: a private US company that elects amortisation will report steadily lower profits and declining goodwill, while an Australian company will carry goodwill at cost until impaired. Comparing their results requires adjustment.
The article Goodwill in acquisitions covers the Australian approach.
Fair value measurement
Both frameworks define fair value as an exit price in an orderly transaction between market participants and use a three-level hierarchy of inputs. The standards were developed jointly and are largely aligned, though detailed application and disclosure requirements can differ.
Other differences worth knowing
Beyond groups and acquisitions, a few broader differences between the frameworks often affect comparisons:
- Inventory: US GAAP permits the last-in, first-out (LIFO) cost method; Australian standards do not.
- Development costs: Australian standards require development costs to be capitalised as intangible assets when specific criteria are met; US GAAP generally expenses research and development, with some exceptions such as certain software costs.
- Revaluation of property, plant and equipment: Australian standards allow assets to be carried at revalued amounts; US GAAP generally does not.
- Reversal of impairment losses: Australian standards allow impairment losses on assets other than goodwill to be reversed if conditions improve; US GAAP generally prohibits reversals for assets held and used.
Reporting requirements in Australia
Which Australian entities must comply with these standards is set by legislation and by the standards themselves. For-profit private sector entities required by legislation, such as the Corporations Act, to prepare financial statements that comply with Australian Accounting Standards must now prepare general purpose financial statements. Many may use a reduced-disclosure framework known as Simplified Disclosures, which keeps the recognition and measurement requirements, including those for investments, consolidation and business combinations, while reducing disclosures. The recognition and measurement differences described in this article therefore apply to many medium-sized Australian businesses, not only listed companies.
Why the differences matter in practice
Learning from US material. Courses, textbooks, online articles and software help files often explain US GAAP. Their concepts are valuable, but Australian readers should check the Australian standard before applying specific rules.
Comparing companies. When comparing an Australian company with a US one, differences in accounting for associates, control, goodwill and small investments can affect reported profit, assets and debt.
Cross-border groups. Australian businesses with US parents, subsidiaries or investors may need to report under both frameworks, or reconcile between them, which requires understanding where they diverge.
Due diligence. When acquiring a business that reports under US GAAP, or selling to a US buyer, understanding how the acquisition will look under each framework helps avoid surprises.
A worked illustration
This is an illustration, not a real company.
An Australian company and a US private company each acquire a similar business for the same price, recognising goodwill of $1 million. Each also holds a 30% stake in an associate and a 5% stake in a listed supplier.
- Goodwill: the US company elects the private company alternative and amortises goodwill over ten years, reducing profit by $100,000 a year. The Australian company does not amortise goodwill, testing it for impairment each year.
- Associate: the US company elects the fair value option, so its profit includes changes in the associate’s fair value. The Australian company must use the equity method, so its profit includes its share of the associate’s earnings.
- Listed supplier: the US company records fair value changes in net income. The Australian company elects to present them in other comprehensive income, keeping them out of profit.
Even with identical businesses and transactions, the two companies’ reported profits could differ substantially from year to year.
Keeping up with change
Both frameworks continue to evolve. Standard-setters regularly review areas such as goodwill, the equity method and disclosures, and changes can affect how acquisitions and investments are reported. The AASB publishes Australian standards and amendments on its website, and the FASB does the same for US GAAP. Businesses with significant investments or acquisitions should check for recent and upcoming changes, or ask their accountants to do so, at least annually.
Common mistakes
Applying US rules in an Australian context. Many concepts match, but details differ.
Assuming business combination accounting is identical. It is closely aligned, but non-controlling interests, the business test and other details differ.
Overlooking the private company goodwill alternative. It significantly changes US private companies’ profits.
Comparing companies without adjusting for framework differences. Reported figures may not be comparable.
Relying on outdated summaries. Both frameworks change; check current standards.
Questions to ask
- Which framework does this material, company or software assume?
- How does the Australian standard treat the same issue?
- Would control be assessed differently under the two frameworks?
- How would goodwill, associates and small investments affect comparability?
- For your own business: do any of your investors, lenders or partners report under US GAAP?
Bringing it together
US GAAP and Australian Accounting Standards share many concepts for investments, groups and acquisitions, and their business combination standards are closely aligned. But they differ in important ways: small equity investments, the availability of fair value for associates, the models for assessing control, the measurement of non-controlling interests, the role of the concentration test and the treatment of goodwill for private companies.
For Australian readers learning from US material, the concepts transfer well, but the specific rules should always be checked against the Australian standards, with professional advice for any significant decision.
Sources: course materials from an advanced financial reporting course (Module 1, based on US GAAP), together with Australian Accounting Standards and International Financial Reporting Standards. Summaries are high level and standards change; check current requirements. This article is general information, not accounting or financial advice; consult a qualified accountant about your circumstances.
