Financial Statements in Accordance with the Generally Accepted Accounting Principles - Case Study Example

International Financial Reporting Standards (IFRS) Introduction There are various accounting standards existent in the world; therefore, each country uses its own Generally Accepted Accounting Principles (GAAP). As a result, firms can report their financial statements in accordance to the GAAP that apply to the countries from where they operate. International financial reporting standards (IFRS) refer to a set of international standards in accounting that determine how the reporting of certain transactions in the financial statements should be done (Godfrey & Chalmers 2007, p. 233). IFRS tends to be based on principles and not rules; this contrasts U.S GAAP, an accounting standard based on rules. Resulting from this difference, IFRS gives the management flexibility and discretion in preparing the financial statements of a company. Overview of IFRS In the recent past, most nations have moved towards adopting a common globalized accounting standard. As such, use of IFRS in many parts of the world has gained widespread prominence and popularity. Regions such as the European Union, Australia, Hong Kong, Singapore and Russia, and other countries have adopted the use of IFRS. In January 2011, Canada adopted the use of IFRS officially; consequently, many countries switched from their accounting standards and adopted the IFRS standard of Canada. The widespread acceptance of International Financial Reporting Standards portrays a fundamental change in the accounting profession. This stems from the fact that the use of IFRS has become a common phenomenon in the accounting profession (Nandakumar et al 2011, p. 3). About 100 countries either allow or require publicly held companies to use IFRS while preparing their financial statements. The Securities and Exchange Commission (SEC) in America has considered setting a date in order to allow U.S. public companies to adopt the use of IFRS. The process of setting international standards started several decades back. Industrialized nations saw the need to devise standards, which could be adopted by small and developing nations unable to come up with their own standards for accounting. With the globalization of business, investors, regulators, auditing firms and large companies realized the vitality of adopting common standards that could apply in all aspects of financial reporting (Kirk 2008, p. 2). Benefits of IFRS The adoption of IFRS has some considerable benefits to the company and the investors who adopt these standards. The adoption of international standards allows the governments, and investors and organizations to have a comparison of the financial statements supported by IFRS with a lot of ease. A notable benefit of International Financial Reporting Standards is that they unify business transactions. IFRS does this by placing all persons in the world at the same level in terms of financial statements (Kirk 2008, p. 9). As a result, domestic firms can display their financial statements on levels similar to those of foreign competitors. Moreover, the unification of business activities enables organizations with subsidiaries in other countries to prepare their statements in an accounting language, which can be universally understood by everyone. Another significant benefit of IFRS is that it saves costs, especially for companies that engage in foreign operations. International Financial Reporting Standards save on costs by enabling internal consistency in the preparation of financial statements and reports. Therefore, costs will be decreased because the preparation of all reports will be done in a manner that is uniform in the various branches of the company. Through the adoption of IFRS, the costs of investments will be reduced (Godfrey & Chalmers 2007, p. 235). The other benefit of IFRS is that it enhances consistency in a company and in its operations. Companies with various subsidiaries have the opportunity to streamline their reporting standards, auditing, training, development standards, and operation standards. The offices of such companies adopt the use of IFRS both globally and domestically. The use of the same reporting standards and techniques enables precise and consistent reporting and keeping of company records (Nandakumar et al. 2011, p. 8). In addition, the adoption of IFRS plays a central role in enhancing better capital markets. Through the adoption of the new system of standardization, global financial reporting will enable the company to suit well in the global market. International Financial Reporting Standards also help in improving the internal communications in an organization. This is because reliable financial reporting allows companies to apply standardized procedures of accounting with its affiliates. This necessitates decision making, internal communications, and the quality of reporting. Through the adoption of IFRS, companies get easy performance appraisal (Godfrey & Chalmers 2007, p. 238). International Financial Reporting Standards increase competitive markets; as such, companies can stand out in the markets. Consequently, investors can have an opportunity to evaluate their performance with that of their competitors. Impact of IFRS on Financial Statements IFRS has had some impacts on financial statements, especially on the way property and equipment, inventory, and goodwill are explained. IFRS allows upward adjustments of property and equipment in the financial statements. This is not the case in GAAP since it does not allow for these upward adjustments. This affects the financial reporting of a firm. For example, when the assets are marked up under IFRS, it leads to a profound increase in their value. This increase is recorded as a gain up to the initial cost; any further upward adjustment goes directly to equity (Antill & Lee, 2005, p. 4). In terms of inventory, the two most commonly used inventory method standards in the past included FIFO (First-in, First-out) as well as LIFO (Last-in, First-out). Under IFRS, LIFO does not apply; therefore, firms that have relied on the use of LIFO in the past will eventually change their inventory method and adopt FIFO (Bragg 2010, p. 64). While using IFRS, goodwill is treated the same way as property and equipment. In the balance sheet, it is reported at the initial cost less any accumulated amortization. Thus, the adoption of IFRS has led to a profound shift in the valuing of assets, which is different from the way they are valued under other accounting standards (Bragg 2010, p. 102). Conclusion While concluding this essay, it is worth noting that the adoption of International Financial Reporting Standards has changed the world of business. IFRS provide for uniformity in accounting standards. The adoption of IFRS means that companies will use similar accounting standards in their operations. The uniformity in accounting standards enables companies to enhance operations by saving on costs of operation as well as creating an enabling environment, especially in the international markets. References List Antill, N. & Lee, K. (2005). Company Valuation Under IFRS: Interpreting and Forecasting Accounts Using International Financial Reporting Standards, New Hampshire, Harriman House Limited. pp. 2-10. Bragg, M. S. (2010). IFRS Made Easy, New Jersey, John Wiley & Sons. pp. 61-117. Godfrey, M. J. & Chalmers, K. (2007). Globalisation of Accounting Standards, Massachusetts, Edward Elgar Publishing. pp. 233-240. Kirk, R. J. (2008). IFRS: A Quick Reference Guide, London, CIMA. pp. 1-20. Nandakumar, A., Mehta, J. K., Ghosh, T. P & Alkafaji, Y. A. (2011). Understanding IFRS Fundamentals: International Financial Reporting Standards, New York, John Wiley & Sons. pp. 1-11. Read More