GAAP VERSES IFRS 6
Accountantsagree that a single set of financial reporting standards andaccounting policies would be beneficial to investors. In response,many companies are converting from GAAP to IFRS to meet theinternational standards. International accountants further agree thatadopting IFRS will increase transparency in the international market.Likewise, it will attract and protect investors thus, beneficial forcompanies (Shamrock, 2012).
Adoptionof IFRS would also benefit the U.S Corporation in the following ways
Many countries have adopted IFRS and many more are gradually converting to this accounting system. Thus, it would be beneficial for US Corporation to follow suit and be able to conduct businesses with other international companies smoothly.
International accounting standards would make it easier to compare multinational businesses and stay competitive and updated on the global market.
IFRS is well understood internationally thus, its adoption would attract investors and multinational companies in the country. This would help in boosting the economy of the country greatly.
Needles,Powers& Crosson (2014) indicates significant differences between GAAPand IFRS as stated below:
Under US GAAP, revenue recognition is comprehensive and includes a volume of literatures. Typically, it focuses on revenue being realized and earned. On the other hand, IFRS captures all revenue transaction on any of these rendering of services, construction contracts, sale of goods, and use of entity’s assets. This makes IFRS more preferable in revenue recognition.
With regard to customer loyalty programs, award credits are allocated based on relative fair value under GAAP. IFRS, however, requires that award or royalty programs be accounted in multiple element arrangements. It requires fair value of award credits to be recognized and deferred separately after revenue recognition. In this case, IFRS delays revenue recognition hence, GAAP is more preferable.
The right of refund in GAAP may prevent recognition of revenue in a service arrangement in case of the right of refund expires. Under IFRS, service arrangement with a right of refund determines whether the contract’s outcome can be estimated or the company would receive an economic benefit. IFRS recognizes its revenue much earlier under this standard.
GAAP uses LIFO (last in first out) method of inventory while IFRS uses FIFO (first in first out) method of inventory. Calculations under LIFO are complex and especially when purchases are done under fluctuating rates. This leaves IFRS’s method of inventory more suitable for companies and the income tax authorities.
Thefollowing are the challenges US corporations are likely to incur byconversing from GAAP to IFRS:
A move from GAAP to IFRS will affect the tax planning and financial reporting. It would be necessary to for US tax law to analyze the tax implications and set a tax law that would conform to IFRS.
Changes in accounting standards will also impact in company’s reporting infrastructure. Corporations should collaborate with IT experts to help in the changes of reporting technology infrastructure.
Conversion to IFRS will also lead to organizational issues especially with stakeholders. Companies will be required to communicate and train stakeholders on the impacts of conversion.
IFRSand GAAP have different lease accounting standards. This may bringlong term issues in accounting lease and lessee. The changes inaccounting policies may not have a significant change however, sinceIFRS lease obligations are less than GAAP, conversion may lead tomore capital leases rather than operating leases. This results to anincrease in long term lease obligation in the balance sheet.
FASBproposed changes of lease accounting standards to recognize leaseassets for all leases of more than one year. This increases greatertransparency about the assets used in cash flows and operations. Forleasers, there should be a partial sale accounting for majority ofthe equipments and account separately for residue asset, which shouldhelp in greater transparency on residue values.
Walton(2009) confirms that conversion from GAAP to IFRS has raised muchconcern in the accounting arena. It is notable that the transitionwill not be smooth for most corporations, which will have to incurextra costs for adopting new reporting standards. The burden will bedisproportionately higher on small scale and medium businesses thatdo not have adequate resources to adopt the change. Further, if USadopt IFRS, there will be monopolization.
Allin all, conversion to IFRS will lead to global uniform in accountingpolicies. IFRS promises to be more accurate in financial informationrelevant to international standards. This would be of much benefit tosmall and medium scale businesses. There is also a reduced likelihoodof professional traders taking advantage of small investors becausethe reporting standards are simpler and puts small and professionalstandards in the same position. Similarly, this monopolization willattract more international investors in to the country. Thesimplicity of the financial reporting standards will impactpositively on business in general. Reducing the differences in thereporting standards helps the United States to cross to internationalborders. The conversion process may not be easy, but it will benefitUS corporations in the long run (Walton, 2009).
Needles,B. E., Powers, M., & Crosson, S. V. (2014). Principlesof accounting.Mason, OH: Cengage Learning.
Shamrock,S. E. (2012). IFRSand US GAAP: A comprehensive comparison.Hoboken, New Jersey: Wiley.
Walton,P. (2009). Anexecutive`s guide for moving from U.S. GAAP to IFRS.New York, N.Y.] (222 East 46th Street, New York, NY 10017: BusinessExpert Press.