Gaap Standards

US GAAP Standards

name: gaap-standards description: Key US GAAP standards — ASC 606, 842, 350, 805

When to Activate

• User asks about US GAAP accounting treatment for revenue, leases, goodwill, or business combinations
• Applying ASC 606 revenue recognition
• Accounting for leases under ASC 842
• Goodwill and intangible asset impairment testing under ASC 350
• Purchase price allocation under ASC 805
• Income tax accounting under ASC 740
• Comparing IFRS vs US GAAP treatment

Core Concepts

ASC 606 — Revenue from Contracts with Customers

ASC 606 mirrors IFRS 15 with the same five-step model. Key differences from IFRS 15 are narrow but important.

Five-step model (same as IFRS 15):

1. Identify the contract
2. Identify performance obligations
3. Determine the transaction price
4. Allocate the transaction price to POs
5. Recognize revenue as POs are satisfied

Key US GAAP-specific guidance:

• Licensing: ASC 606 provides specific guidance for IP licenses — functional IP (recognized at a point in time) vs symbolic IP (recognized over time)
• Contract costs: ASC 340-40 requires capitalizing incremental costs of obtaining a contract (e.g., sales commissions) and amortizing over the benefit period
• Disclosure: Extensive disaggregation requirements (by geography, timing, type)

Practical expedients:

• Portfolio approach: apply to a portfolio of contracts with similar characteristics
• Significant financing component: ignore if payment expected within 1 year
• Shipping and handling: may treat as fulfillment activity (not separate PO)
• Completed contracts: no need to restate contracts completed before adoption

ASC 842 — Leases

Unlike IFRS 16, ASC 842 retains a dual classification model for lessees.

Classification test (any ONE triggers finance lease):

1. Transfer of ownership at end of lease
2. Purchase option reasonably certain to be exercised
3. Lease term is major part (≥ 75% rule of thumb) of asset's economic life
4. PV of lease payments is substantially all (≥ 90% rule of thumb) of fair value
5. Asset is specialized with no alternative use to lessor

Finance lease (formerly capital lease):

Balance sheet: ROU asset + lease liability (same as IFRS 16)
P&L: Amortization of ROU asset (straight-line, in operating expense)
     + Interest on lease liability (front-loaded, in interest expense)
     = Total expense is front-loaded
Cash flow: Interest in operating; principal in financing

Operating lease:

Balance sheet: ROU asset + lease liability (same recognition as IFRS 16)
P&L: Single lease expense, recognized straight-line over lease term
     (allocated between amortization and interest for BS purposes,
      but reported as a single operating expense line)
     = Total expense is straight-line
Cash flow: All payments in operating activities

Key difference from IFRS 16: Operating leases under ASC 842 produce straight-line expense (not front-loaded). This affects EBITDA, operating income, and interest expense comparability.

ASC 350 — Goodwill and Other Intangible Assets

Goodwill impairment (simplified one-step test since ASU 2017-04):

Step 1 (optional): Qualitative assessment — is it more likely than not (>50%)
that fair value of reporting unit < carrying amount? If no, stop — no impairment.

Step 2 (quantitative): Compare fair value of reporting unit to its carrying amount
(including goodwill).
  If FV < Carrying Amount → impairment loss = Carrying Amount - FV
  Impairment loss cannot exceed the goodwill allocated to that reporting unit.

Key differences from IFRS (IAS 36):

• US GAAP tests at the reporting unit level (one level below operating segment)
• IFRS tests at the CGU level (often smaller)
• US GAAP uses fair value; IFRS uses the higher of fair value less costs of disposal and value in use
• Under IFRS, goodwill impairment is never reversed; same under US GAAP
• US GAAP allows the qualitative assessment (Step 0); IFRS does not have an explicit qualitative screen

Indefinite-lived intangible assets (e.g., trade names):

• Annual impairment test: compare fair value to carrying amount
• If FV < carrying → impairment loss recognized
• Same qualitative assessment option available

Finite-lived intangible assets:

• Amortized over useful life
• Tested for impairment only when triggering events occur (ASC 360 two-step test)

ASC 805 — Business Combinations

Acquisition method (same framework as IFRS 3):

Goodwill = Consideration transferred (FV)
         + NCI (at fair value or proportionate share — policy election per deal)
         - Net identifiable assets acquired at fair value

Key US GAAP-specific differences from IFRS 3:

• Contingent consideration: Both IFRS and US GAAP measure at fair value at acquisition. Subsequent remeasurement through P&L under both, but US GAAP has more detailed guidance on classification (liability vs equity).
• In-process R&D: Capitalized as an intangible asset (indefinite-lived until project completes or is abandoned); under IFRS 3, same treatment.
• Bargain purchase: Gain recognized in P&L immediately (IFRS 3: same, but reassess measurements first).
• Measurement period: Up to 1 year; adjustments are retrospective during the measurement period.

Acquisition-related costs: Expensed as incurred (not part of consideration). Same under IFRS 3.

ASC 740 — Income Taxes

Deferred tax framework:

Temporary Difference = Book Basis of Asset/Liability - Tax Basis

If Book Basis of Asset > Tax Basis → Deferred Tax Liability (DTL)
If Book Basis of Asset < Tax Basis → Deferred Tax Asset (DTA)
(Reverse for liabilities)

DTA recognition:

• US GAAP: recognize DTA in full, then assess need for a valuation allowance
• Valuation allowance if "more likely than not" (>50%) that some/all DTA will not be realized
• Sources of taxable income to support DTA: reversing DTLs, future taxable income, tax planning strategies, carryback availability

Key differences from IFRS (IAS 12):

• IFRS recognizes DTA only to the extent it is "probable" that taxable profit will be available (no valuation allowance concept)
• US GAAP recognizes full DTA then assesses valuation allowance (gross-up approach)
• US GAAP prohibits discounting deferred taxes; IFRS also prohibits discounting
• US GAAP uses enacted tax rates; IFRS uses enacted or substantively enacted rates

Tax rate reconciliation:

Statutory Rate                          ___%
+ State taxes (net of federal benefit)  ___%
+ Non-deductible expenses               ___%
- Tax-exempt income                    (__%)
+ Foreign rate differential             ___%
+ Valuation allowance change            ___%
+ Other                                 ___%
= Effective Tax Rate                    ___%

Methodology

IFRS vs US GAAP Key Differences Summary

Common US GAAP Pitfalls

• Forgetting to capitalize contract costs (ASC 340-40) — commissions on multi-year deals
• Misclassifying operating vs finance leases — the 75%/90% bright lines are guidelines, not absolute rules
• Not testing goodwill at the correct reporting unit level
• Ignoring the requirement for a valuation allowance assessment each period
• Inconsistent treatment of SBC in adjusted/non-GAAP metrics (SEC scrutiny)

Templates

US GAAP Compliance Checklist

=== US GAAP COMPLIANCE CHECKLIST ===

Standard   | Area                           | Status | Notes
ASC 606    | Revenue policy documented      | [ ]    |
ASC 606    | PO identification              | [ ]    |
ASC 606    | Contract cost capitalization    | [ ]    |
ASC 842    | Lease classification assessed   | [ ]    |
ASC 842    | ROU assets/liabilities on BS    | [ ]    |
ASC 842    | Discount rate documented        | [ ]    |
ASC 350    | Reporting units defined         | [ ]    |
ASC 350    | Annual goodwill impairment test | [ ]    |
ASC 350    | Indefinite-lived intangibles    | [ ]    |
ASC 805    | PPA completed within 1 year     | [ ]    |
ASC 805    | Contingent consideration FV     | [ ]    |
ASC 740    | DTA valuation allowance         | [ ]    |
ASC 740    | Rate reconciliation             | [ ]    |
ASC 740    | Uncertain tax positions (FIN 48)| [ ]    |

Lease Classification Decision Tree

=== ASC 842 LEASE CLASSIFICATION ===

Does ownership transfer to lessee? → YES → Finance Lease
                                    → NO ↓
Is there a bargain purchase option? → YES → Finance Lease
                                    → NO ↓
Is lease term ≥ 75% of economic life? → YES → Finance Lease
                                       → NO ↓
Is PV of payments ≥ 90% of FV?    → YES → Finance Lease
                                    → NO ↓
Is asset specialized?              → YES → Finance Lease
                                    → NO → Operating Lease

Quality Gate

Before finalizing US GAAP accounting, verify:

• ASC 606: performance obligations are identified with documented basis for distinct/not distinct
• ASC 606: SSP estimates are supportable and consistent period-over-period
• ASC 606: contract costs (commissions) are capitalized and amortized per ASC 340-40
• ASC 842: lease classification (operating vs finance) is documented with quantitative support
• ASC 842: all leases are on balance sheet (ROU asset and lease liability)
• ASC 842: discount rate uses rate implicit in lease or IBR (not generic benchmark)
• ASC 350: goodwill is allocated to reporting units and tested annually
• ASC 350: triggering events are monitored between annual tests
• ASC 805: all identifiable intangibles are separately recognized in PPA
• ASC 805: acquisition costs are expensed, not capitalized
• ASC 740: valuation allowance is assessed each reporting period
• ASC 740: uncertain tax positions are evaluated under the two-step process (FIN 48)
• All non-GAAP measures reconcile to the nearest GAAP measure (SEC compliance)