Inventory Methods Fifo Lifo And Weighted Average Pros And Cons US GAAP Vs IFRS

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US GAAP Vs IFRS

For those in the business world – especially in the field of finance – a major issue has arisen in recent years related to the differences between the Generally Accepted Accounting Principals. (GAAP) and International Financial Reporting Standards (IFRS). Currently, most countries in the world follow the International Financial Reporting Standards; however, the United States still uses the Generally Accepted Accounting Principals. This topic has been the focus of everyone’s attention because there is already a draft agreement between the two parties in the near future. The financial system in the United States will undergo drastic changes when this happens, but in the long term the idea is to simplify the way money is handled around the world. The main difference between GAAP and IFRS is that GAAP is based on rules, while IFRS is based on principles which means that IFRS has room for interpretation. The specific differences are too numerous to be discussed in a brief presentation, however, explanations of some important differences are provided below.

In some cases, GAAP and IFRS follow different approaches to defining specific amounts as well as how those amounts are recognized in the financial statements and in the notes. One of these cases occurs in the measurement of inventory. Unlike GAAP which accepts FIFO, LIFO, and the weighted average method, IFRS does not accept LIFO. Also, when inventories are recorded on the balance sheet, IFRS requires that they be reported at the lower of historical cost or net realizable value. GAAP, on the other hand, requires that products be carried at the lower of historical cost or replacement cost. Other differences occur in the measurement of property, plant and equipment. Property, plant and equipment are measured at cost. After adoption, however, GAAP and IFRS have variations in how they treat these assets. Under IFRS, PPE can be valued if a higher fair value exists; GAAP does not allow for remeasurement after recognition.

There are also differences in the sale of services, particularly in the way revenue is recognized. For US GAAP, the percentage of costs of the completion method is prohibited unless the contract specifically states otherwise. The completed method is the generally accepted method under GAAP. When the outcome of an offering cannot be reasonably estimated, revenue must be temporarily deferred. For sale of services under IFRS the percentage of completion method is followed. When transactions cannot be reasonably estimated in this system, the break-even model is used and revenue is recognized at the level of recoverable costs. In some cases, the outcome may be uncertain: in this case, revenue must be deferred until a better estimate of sales is made.

Income is recognized in other ways in insurance. Under Generally Accepted Accounting Principals, product maintenance revenue is typically deferred and recognized as revenue on a straight-line basis over the life of the contract. When insurance is purchased separately or in addition to the original insurance, revenue is determined by reference to the sales price of the maintenance contract. Under International Financial Reporting Standards, long-term insurance income is deferred. The recognition of this income will occur during the period covered by the insurance.

Construction contracts are also an area where revenue recognition differs between the two accounting systems. The preferred method used in US GAAP is the percentage of completion method. However, when reasonable estimates are not possible, it is necessary to use the contract method. The percentage of completion method has two different methods: the first is revenue and the second is profit. IFRS generally uses the method under the percentage of completion method. When a construction project cannot be reasonably valued, the non-profit method is used because IFRS does not permit the use of the profit method.

As mentioned above, the details of all the changes and changes that have to happen are too many to cover in a short presentation. All the differences mentioned – even if they are few of the many – are important in the field of things. Accounting standards are very specific and difficult to understand, hence the reason for mutual planning for the future. There will be less confusion in the accounting world if there is some sort of uniformity among most countries. US GAAP is easily the most comprehensive of all systems in existence today. With IFRS having more room for interpretation, it removes the complexities based on the rules that exist within GAAP standards. Hopefully with convergence there will be more uniformity and less confusion in accounting around the world.

Genna Francesca Squadroni

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