The Impact on the Financial Activities of a Business due to the Shift from GAAP to IFRS - Research Proposal Example

Research Topic: The Impact on the Financial Activities of a Business due to the shift from GAAP to IFRS Table of Contents Introduction 3 A.Aims andObjectives 3 B.Hypotheses 3 2.Literature Reviews 4 A.GAAP Accounting Standard 4 B.IFRS Accounting Standard 4 C.GAAP vs. IFRS 5 3.Research Design (Methodology) 6 A.Primary Data & Secondary Data Collection 6 4.Analysis and Findings 7 5.Conclusion and Recommendations 8 Reference 8 1. Introduction Every business requires a proper maintenance of accounting records to ensure smooth functioning of its financial activities. Accounting is the scientific method of recording and maintaining the financial activities that helps to provide the necessary information regarding the financial position of a business. This information also helps the investors as well as the management to analyze the companies’ future prospects before taking the final decision. Though a number of accounting standards are prevalent, it is important for the companies to choose the most relevant one, in order to get a clear picture of their financial positions. A. Aims and Objectives Two international accounting standards are more popular than the others: GAAP accounting standard and International Financial Reporting Standards (IFRS) accounting standard. GAAP is the traditional accounting standard whereas IFRS is the latest method. Gradually the companies are transcending from GAAP to IFRS in their preference for accounting standards. This research proposal aims to evaluate the impact of the shift from GAAP to IFRS on the financial activities of a business. B. Hypotheses Generally accepted accounting method (GAAP) is the most prevalent accounting standard but many countries are now gradually shifting from GAAP to the International Financial Reporting Standard (IFRS) which is a modern and updated accounting standard. This conversation has favorably affected the financial activities of businesses. 2. Literature Reviews A. GAAP Accounting Standard It is the traditional method of collecting, preparing, presenting the accounting information to the stakeholders including investors, management, and the government. The principles of the GAAP accounting methods “are the basis of an accounting system which is separate and different from statutory accounting” and this “statutory accounting is concerned primarily with solvency and security of policyholders” (Tiller & Tiller. 2005. P.367). This accounting standard reflects the financial accounting standard of the federal and it is a prominent accounting method in US. It was first evolved in US and the major “accounting policy-making bodies” of US like “the Financial Accounting Standards Board (FASB), Accounting Principles Board (APB) and Securities and Exchange Commission (SEC)” ware responsible for the evolution of this accounting standard (Nikolai, Bazley & Jones. 2009. P.9). The principles of GAAP focus on the four major qualities of an ideal accounting method. These are reliability, relevance, comparability and consistency. The financial statements prepared by GAAP accounting method provide a reliable source of financial information and these are verifiable statements. Relevance is another important feature of GAAP. It discloses relevant financial data that helps to evaluate the financial position of a company. Comparability is one the most useful principle that enables one to decide a company’s position within the industry. The company can evaluate its financial performance by comparing its past performance with the present. It makes the accounting system consistent by providing a set benchmark for accounting method. B. IFRS Accounting Standard International Financial Reporting Standard (IFRS) is an alternative and modern accounting method. It is popular in many countries as the alternative method of GAAP accounting standard. IFRS accounting method has been developed by the IASB (International Accounting Standards Board) which is an “independent standard-setting body of the IFRS Foundation” (IFRS Foundation. 2010). It has been considered to be the most influential and useful accounting standard. The primary objective of IFRS is “to enhance the relevance, reliability and comparability of the information that an entity provides in its financial statements about a business combination and its effect” (International Accounting Standards Board. 2008. P.327). The reason for developing it is to provide an accounting method that will be globally accepted. As the business is turning global, the investors are now required to invest their money in the foreign markets. Therefore, it is important to have a fixed set of rules governing the accounting standards so that all the companies are judged by the same parameters. The IFRS is a useful accounting standard in this respect. This accounting system discloses more relevant data than the GAAP accounting standard. It focuses on certain important aspects of financial activities. First of all, it is useful to recognize and to measure the acquired identifiable assets, assumed liabilities, and the financial statements. Secondly, it also measures the intangibles like goodwill. Thirdly, the information disclosed by the IFRS accounting method helps to forecast the future financial performances of a company. Fourthly, IFRS enables one to prepare the financial statement as it takes into account the fair value of all the tangible and intangible assets. C. GAAP vs. IFRS The IFRS and the GAAP have similar objectives but are different in their approaches. The conversion of the global accounting standard is a crucial evolution in the history of accounting. IFRS accounting standard provides more relevant and useful financial information than the GAAP accounting standard. The people are now looking for a developed accounting standard to conduct their global business. According to a report of AICPA (The American Institute of Certified Public Accountants), “the number of countries that require or allow the use of IFRS for the preparation of financial statements by publicly held companies has continued to increase” (AICPA. 2010). IFRS is meant to provide transparent and clearer financial accounting system that helps the investors to make their portfolio strategy. IFRS helps to describe the financial information “in terms of the transfer of risk and reward of ownership and the realization principle” (Stickney, Weil, & Schipper. 2009 P.342). However, the GAAP accounting standard is unable to provide such information. The primary difference between GAAP and IFRS is that IFRS focuses on the disclosure of the comparative financial information of company. The general approach of the IFRS is “more principles-based standards with limited application guidance” whereas; the GAAP is “more rule-based standards with more specific application guidance” (Deloitte. 2006). 3. Research Design (Methodology) In order to study the impact of the conversion from GAAP to IFRS, a research will be conducted. The foremost task is to design the relevant research methodologies that will yield the reliable output. The research methodology will include the primary and the secondary research and both the research will help to find exploratory and quantitative output. A. Primary Data & Secondary Data Collection This research paper will include both primary and the secondary data in order to explore the impact of the conversion on the accounting standard. The primary data will be collected through interviews and for which a set of relevant questions will be designed. The questionnaire will be prepared in order to collect the qualitative data related to the importance and usefulness of the GAAP and the IFRS accounting standards. The financial managers and the accountant will be interviewed so as to evaluate their response regarding this conversion and whether they are supporting it. The primary data will also disclose the changes in the financial activities after the shift from GAAP to IFRS. The secondary data will be collected from the websites of different companies and their annual reports. This is because the companies mention their accounting standards in their annual reports. The latter serve as a good source of information on the present as well as the past financial activity i.e. the status of the company before and after the conversion was made. 4. Analysis and Findings After collecting the primary and the secondary data, an analysis will be done in order to obtain the findings resulting from the conversion. The primary research findings will mainly contain the interview data that will be collected though a relevant questionnaire. The financial managers and the accountants will be interviewed as they are expected to disclose the advantages and the disadvantages of the accounting standards currently followed by their company. They are also expected to give their views on whether the company should go for IFRS accounting standards. The secondary research will identify the prominent accounting standards followed by most of the countries and the reason for the companies to shift from GAAP to IIFRS. Analysis of the annual reports will reveal the change in the financial activities due the shift from GAAP to IFRS. The comments from the policy-makers and the finance managers will be analyzed to identify the subtle nuances that have resulted ‘in and from’ this paradigm shift. 5. Conclusion and Recommendations The primary and the secondary findings will be arranged as per the requirements of the research topic. This will help to test the authenticity of the hypothesis and to meet the objectives of this research paper. This section will also discuss the importance of the findings that will be obtained from the research and the pros and cons of both IFRS and GAAP. Finally, it will identify the most appropriate accounting method for the company to execute. Recommendation will be suggested for the future benefit of the company. Not only with it propose the most suitable accounting standard but will also propose the required modifications that a company must undertake before implementing the new accounting standard. Reference AICPA. 2010. International Financial Reporting Standards (IFRS). [Pdf]. Available at: http://www.ifrs.com/pdf/IFRSUpdate_V8.pdf. [Accessed on July 19, 2010]. Deloitte. 2006. Some Key Differences between IFRSs and US GAAP as of August 2005. [Online]. Available at: http://www.cs.trinity.edu/rjensen/Calgary/CD/JensenPowerPoint/IAS%20Plus%20-%20Comparison%20of%20IFRSs%20and%20US%20GAAP.htm. [Accessed on July 19, 2010]. IFRS Foundation. 2010. About the IFRS Foundation and the IASB. [Online]. Available at: http://www.ifrs.org/The+organisation/IASCF+and+IASB.htm. [Accessed on July 19, 2010]. International Accounting Standards Board. 2008. International Financial Reporting Standards IFRS 2008. Kluwer. Stickney, Weil, & Schipper. 2009. Financial Accounting: An Introduction to Concepts, Methods and Uses. 13th Edition. Cengage Learning. Tiller and Tiller. 2005. Life, health & annuity reinsurance. 3rd Edition. ACTEX Publications. Nikolai, L.A. Bazley, J.D. & Jones, J.P. 2009. Intermediate Accounting. 11th Edition. Cengage Learning. Read More