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Globalization: GAAP and IFRS Convergence

Together, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) set and enforce most of today’s accounting standards and guidelines. In the United States, the FASB has established procedures based on accounting principles called GAAP (Generally Accepted Accounting Principles). Internationally, more than 110 countries around the world have adopted a more conceptual approach called International Financial Reporting Standards (IFRS), which emerged from the IASB. Therefore, when investors compare two foreign companies, a discrepancy between the two standards creates misleading financial statements. Globalization, through the harmonization of accounting standards, allows investors to make more reliable comparisons between international companies. Valuation of different accounts can often arise when dealing with inventory accounts and intangible assets. Other accounting reporting issues will be discussed throughout the article.

When evaluating the balance sheet of a company’s assets, there are many valuation systems that can be used. What if all companies turned to record keeping in some way? This alignment will improve inventory data and create reliable data for all users when comparing international investments. In GAAP, accounting guidance is found in ASC 330-10. This section shows the many ways people can manage their inventory, be it LIFO (Last-in, First-Out), FIFO (First-in, First-Out), or an average type. But since 2013, the IFRS stated in the section IAS 2, Inventories, that they will not allow LIFO because of its tax advantage during the period of the cost of living. expensive goods. The FASB has consistently criticized the IASB’s abandonment of LIFO on the grounds that it produces more accurate financial data by equating current revenues with the most recent costs.

Although there are many different approaches to financial accounting, both the FASB and the IASB define inventories as assets that are held for sale during the day-to-day operations of the business and are used in the business process. production. But the way the account value is treated abroad still makes a difference that can mislead users when comparing companies. GAAP values ​​inventory costs using the Lower of Cost or Market (LCM) method to determine the lower of the asset’s cost and current market value. Once the lower value is determined, GAAP states that it is not possible to re-list the inventory at market value when economic changes affect the property. IFRS differs from GAAP in that it uses the lower of cost or realizable value method when valuing its instruments. The Net Realizable Value (NRV) includes the selling price, minus the salvage value and other costs to complete the asset. Also in IFRS, you can write the return on the inventory value if the market price changes to be lower than the NRV according to the comparative report of PWC by David Schmid. These reversals are allowed due to the rules-based approach of IFRS, as GAAP has established rules to prevent these types of sudden changes.

Another accounting method where GAAP and IFRS differ is the valuation of intangible assets and costs. GAAP development expenses and advertising costs, when Goodwill and other intangibles may be capitalized in ASC 350-40. IFRS provides management with a more comprehensive approach to accounting for intangible assets that can be recognized when the feasibility of a project can be demonstrated. Advance payments for advertising goods and services can be classified as assets if they are paid before the company can receive them.

Overseas companies also report on a different test than US companies. IFRS has developed a single method of accounting for losses at the end of a period. US GAAP has a two-step process that first determines whether an impairment is necessary using a reversal test. In the first step, the accountant reconciles the value of the intangible with the total amount of future unrealized cash. If it is not recoverable, an impairment loss is calculated and recorded. These types of accounting differences may result in differences in the accounting values ​​of certain instruments.

IFRS and GAAP are the two most important accounting standards in the world. Therefore, it is important for the IASB and FASB to agree on the topics discussed. Cost accounting and valuation of intangible assets are two important areas where the same accounting should be done. An additional difference is that there are special items that are prohibited in IFRS statements, while GAAP values ​​these activities if they are unusual and unusual. Also, it is required in IFRS to disclose the main compensation of management if not in GAAP according to Julie Santoro of KPMG in his report on the two accounting standards.

Investors look carefully through financial statements, so all data is more reliable to help them make decisions. The IASB and the FASB need to come together on important areas where there is no consistency. The GAAP principles-based approach clearly lays down the law on what can and cannot be done in most circumstances creating clear and comparable domestic financial statements. The approach to IFRS rules sets guidelines to cover all possible accounting situations, but numbers are adjusted aggressively when managers try to manipulate numbers. Currently, these two different methods result in inaccurate financial data and it is up to the FASB and IASB to declare the correct accounting for future comparisons.

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