U.S. GAAP vs. IFRS

U.S. GAAP vs. IFRS

U.S. GAAP vs. IFRS

GAAP vs. IFRS

In this brief work I would like to discuss some of the main differences between the United States' Generally Accepted Accounting Principles, and the more recently enacted International Financial Reporting Standards, for international use. The United States is working closely with the rest of the world to find a way to narrow the gap between what the U.S. sees as acceptable accounting standards and what the rest of the world does. Many professors I have in my accounting classes now and many other professionals in the accounting world think that these two different institutions will come together within the next few years to produce universal standards on what's acceptable for accounting terms.

The revered accounting firm Ernst & Young published a work entitled, "US GAAP vs. IFRS the basics" in which they give some key differences between these two standards, I will be referencing that work in this paragraph and following paragraphs. The first main differences I would like to discuss involves the way in which companies distribute there inventories. Currently under U.S. GAAP there are three acceptable methods of using their inventories, First In First Out, Last In First Out, and Weighted Average. In IFRS LIFO is not accepted, also, "Same cost formula must be applied to all inventories similar in nature or use to the entity." In U.S. GAAP you can have all three different methods, but you must not change which method you use from year to year. In International Standards you must use the method throughout all your business' inventories.

Two other enormous issues that exist between these two opposing standards are the measurements and the reversal of inventory write-downs. Due to U.S. GAAP's constraint of conservatism, "Inventory is carried at the lower of cost or market. Market is defined as current replacement cost as long as market is not greater than net realizable value (estimated selling price less reasonable costs of completion and sale) and is not less than net realizable value reduced by a normal sales margin." IFRS seems to have a different view on this issue that says, "Inventory is carried at the lower of cost or net realizable value (best estimate of the net amounts inventories are expected to realize. This amount may or may not equal fair value)." This basically means that inventories can be written down at a cost lower than the cost of market, this could be a problem if inventories are stated over the lower cost of value. If inventories are overstated, Cost of Goods Sold would also be overstated, thus creating a Net Income that is actually lower than your actual Income. If your Income is understated that could be a big problem when allocation your funds to different things, also stock and debt holders could have skewed thoughts about the company. Another issue that is closely related to this is U.S. GAAP states that. "Any write-downs of inventory to the lower of cost or market create a new cost basis that subsequently cannot be reversed." This means that if you as a company buy some type of inventory when the market for that item is high, then there is a huge drop in the cost of that item you cannot write that down as a loss. IFRS proclaims, "Previously recognized impairment losses are reversed, up to the amount of the original impairment loss when the reasons for the impairment no longer exist." This basically says that you can record the previous situation as a loss.

Something that has been a bite of a debate between these two theories has brought about another hot button issue is revaluations of assets. U.S. GAAP says by no means can an asset be reassessed and changed for an alternative value. IRFS tells us this, "Revaluation is a permitted accounting policy election for an entire class of assets, requiring revaluation to fair value on a regular basis." Currently for U.S. companies assets are bought at a certain price and cannot be changed for fair market value, in contrast International IRFS says that assets at anytime should be reassessed at fair market value. A situation that comes to mind in which this could hold major importance is if you are a delivery company and you buy a fleet of cars when the price for them is very low, then the market for that particular item goes up you can report that asset at a new fair market value.

These are just a few issues and points I wanted to raise, these issues seems to be very important in many situations and businesses that I have researched. U.S., GAAP and International, IRFS, are coming much closer together and have been expected to merge within the next few years. This entire operation of trying to find common grounds for which International and U.S. accounting standards is all just in response to the International business environment that we live in. The world is becoming a place in which you cannot just interact within your own community and country to be a successful expanding business. In conclusion has tough and as far apart as these to policies might be it is important that we have a universal code to which account for our businesses, so our businesses can flourish and thrive.

Bibliography

Ernst & Young LLP,. "The Basics." US GAAP vs. FRS (2009): 1-52. Web. 16 Nov 2010. .

AICPA, Initials. (2010, November 16). Ifrs resources. Retrieved from http://www.ifrs.com/index.html

FASAB, Initials. (2010, November 16). Federal accounting standards advisory board. Retrieved from http://www.fasab.gov/accepted.html

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