International Accounting Standards - PDF
Added on 2021-05-31
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International Accounting QuestionsStudent’s NameInstitutionDate
Question 3To answer this question, the paper will consider the differences between IFRS and US GAAP in terms of inventories, fixed assets, intangible assets and development costs. First of all, it is necessary to point out the difference terminological. In the case of IFRS, the notion of "standards" should be interpreted as principles. As for the GAAP, in this case the principles should be understood as rules. Their "common acceptance" means either that they are approved by the authorized organization of professional accountants as the principles (rules) for accounting or reporting in a particular area. As for the valuation of inventories, there are three important differences. First, the application of the method of valuation of inventories "last-in-first-out" is not allowed for IFRS, but it is allowed for GAAP. Secondly, international standards permit (under certain conditions) the cancellation of revaluation results of inventories, which is prohibited in the US GAAP. Thirdly, IFRS permits the estimation of inventories at the lowest cost or net realizable value, while the GAAP allows the estimation of inventories at the lowest cost or market value. More importantly, the cost of inventories in the balance sheet compiled in accordance with IFRS is higher due to the impact of inflation and other factors.In any case, the cost of inventories in the case of IFRS-based reporting is equal to or higher than the cost obtained in calculations in accordance with GAAP. In other words, generallyaccepted accounting principles are more conservative in this sense. Refusal to use the LIFO method makes it possible to simplify the comparison of the two companies, since it eliminates the need to adapt the estimates obtained in different ways.
LIFO is a development of the concept of a basic stock, which became widespread in the United States and Great Britain in the early 1990s. The main point of this concept is that the basestock (the amount of inventories established by management) is never sold. However, if the base stock is exhausted, the goods sold are treated as borrowed from the underlying stock and recovered at the current market value. Lack refers to the value of sales and is deducted from inventories, which leads to their decrease during periods of increased costs. The US Treasury Department banned the use of this approach for tax purposes in 1919, 11 years later, the SupremeCourt also banned the application of the approach. GAAP does not provide for the exact correspondence of the company's accounting procedure for inventories to the actual (physical) flow of goods. This is important, because the scheme "last arrived - first served" seldom corresponds to the actual state of things. The LIFO method assumes that the price of the last batch of goods is included in the profit and loss account, and in the balance sheet stocks are accounted for at the "old" price. The use of the LIFO leads to a significant inconsistency in the recognition of costs and revenues, which contributes to increasing the difference between IFRS reporting and GAAP reporting.Another difference concerns the way they value assets. International Financial Reporting Standard No. 16 permits the use of the fair value principle for the valuation of property, plant and equipment, but only historical (historical) cost is allowed. Accordingly, the cost of fixed assets, reflected in the balance sheet, in the case of applying IFRS higher than in the case of the application of GAAP. It is noteworthy that IFRS No. 38 also allows for accounting based on fair value in the revaluation of intangible assets, which is not provided for by US generally accepted accounting principles. For example, it allows you to charge development costs, as well as subsequent R & D expenses, to the capital account if they meet certain criteria, therefore the
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