International Financial Reporting Standards - Assignment Example

Discussions: Finance and Accounting Discussions: Finance and Accounting Discussion The U.S. GAAP and the International FinancialReporting Standards (IFRS) differ in their approach to consolidated financial statements. This is through a number of ways. The interpretation of information from the two bodies is one way in which they differ (Warren et al, 2011). The approaches that the two take in how they run things bring about one difference. The standards that IFRS run their business are based solely on principles. They are also broader than their U.S. counterparts. Their differences are structured in the standards they have set themselves (Warren et al, 2011). In trying to better quality and consistency of their standard issuance, they are able to review their own existing standards. This is, unlike their U.S. GAAP. Support for the IFRS has become tremendous in these modern times. This is due to their ability to think faster than their counterparts in the GAAP process. Due to the laxity in interpretive matters, it is hard not to realise that the IFRS is the only way to go about consolidating financial statements. The limited interpretive guidance that exists in the GAAP does not necessarily make it appear at the top of the list as an option for consolidating financial statements (Warren et al, 2011). An alternative to the current GAAP or IFRS requirements for consolidated financial statements could be the convergence of the two. Though not an easy task, it may be of benefit to all the parties involved. Cash outflows may result during the shift or change in the two parties (Warren et al, 2011). This approach may be more appealing to smaller companies. This is since they can choose not to adopt the IFRS. They would, thus, save capital in the process. Discussion 2 In accounting for investments, GAAP would be a crucial approach to use. The methods that it offers provide a wide range of possibilities (Warren et al, 2011). The amount of power that the shareholder has over the investee is clearly spelled out in this approach. It can help determine the method that anyone investing on something can use in order to account for their investments. This way, each and every person, can mutually benefit from all the financial transactions. There are different methods in which accounting for investments can be carried out. These methods are clearly outlined in the GAAP (Warren et al, 2011). One of the methods is the market method. In this method, the investment account is written in a balance sheet. In this balance sheet, the investment is rated at its current market value. The dividends that are received are seen as income, and this helps the investor attain balance in the investment. They are then reported in the current income, and the investment is accounted for depending on whether the investment can be rated as passive or active (Warren et al, 2011). Then there is the equity method. Here, the investment cannot be reported at its market value (Warren et al, 2011). However, it is reported at the amount equal to the amount invested in the party that has been invested upon. This is known as the investee. Accounting is done according to the amount received annually and thus the investment is accounted. In the third method, there is the consolidation. It stipulates that the equity method be implemented to stand in for the investment. However, the approach requires that once an investor can control the investee, the financial statements need to be consolidated. Discussion 3 There are two effective alternatives that are responsible for accounting for interim acquisitions of subsidiary stock. These are the full-year reporting alternatives, and the partial-year reporting alternatives. They are both effective in accounting for interim acquisitions, however, one of them is grander than the other. The partial year reporting is most applicable in most cases. Many companies opt to know how they are coping during half the period they are conducting business (Warren et al, 2011). This is the main rationale behind this alternative. Companies do not want to get to the end of a year to know where they stand with issues concerning their subsidiary stock. Also, with the partial-year reporting, it is easier for a company to allocate costs during the periods that exist on a much easier scope. One term cannot benefit more than another. The non-allocation of costs can lead to the accrual of costs if a lengthy period is chosen (Warren et al, 2011). The differences that exist between the GAAP and IFRS pose a great challenge to the greatest number of companies. However, the most significant challenges may be posed by the IFRS. This is due to some of the standards that it may have placed. They restrict flexibility among companies to move as freely as the need to in order to maximise on their business opportunities (Warren et al, 2011). An example would be the uniform accounting policies. In the GAAP, there is no need for stipulated accounting policies between the investor and investee. However, in the IFRS, there has to be a uniform accounting policy between the two parties. This is for purposes of uniformity and conformity. Discussion 4 Intercompany transactions involve transactions between two companies. An example that could be used would be supplier selling products to a retailer. Green Mountain Coffee is a company involved in intercompany transactions. It has been involved in cases that report it as having improperly recorded some revenue on shipment. This led to the earnings and inventories it handles being overstated (Warren et al, 2011). A company can use intercompany transactions to manipulate earnings in a number of ways. These include how a company has priced its products (Warren et al, 2011). The pricing that one company has on its products can distort the earning it may receive from the company it is dealing with. The company may either have a low price level or a high one. All this depends on the business it runs, and management it has. The company has treated its intercompany transactions with a lot of dishonesty. These transactions are considered by many as a means to make a quick buck from hardworking individuals. It is easier to walk into a retail store, and purchase some of their products than have them shipped over. This can be in whichever location where one is situated. However, an individual needs to look at the bigger image in such a case. Having the products shipped over different locations is much difficult than moving them to one location, for example, a retail store. Therefore, one has to agree with this approach only if the shipping is done to far areas (Warren et al, 2011). Discussion 5 The differences that exist between the GAAP and IFRS, with regard to intercompany activities have played a crucial role in bringing information to financial statements users. They have been influential in the way the information is distributed, and handled by the would-be users of this information. The differences that exist, however, create a scenario whereby there is a possibility that one of them is more superior to the other (Warren et al, 2011). In this case, the GAAP is more superior in giving the best information to financial statement users. The differences that exist between the two prevent one of them from reaching a wider group of financial statement users. In the GAAP, it is not specific as to the elimination of profits and losses in the intercompany transactions (Warren et al, 2011). It is, therefore, more diverse than IFRS. IFRS requires that all the profits and losses recorded through intercompany transactions be eliminated completely. The organizations need to let companies make their own decisions when it comes to intercompany transactions. Impairment charges, under the U.S. GAAP, should be recorded directly. This may create a new cost basis from which products costs may be based upon in all companies. This then creates a level playing field for all companies and the progress they make in the industry. There is the certain condition that is set by the U.S. GAAP. This condition prohibits a company from reversing its impairment losses for any of their assets (Warren et al, 2011). This regulation does not favour many companies. Therefore, it needs to change this requirement. Discussion 6 The allocation of the purchase price of a business among the different classes of assets that exist is necessary when the business is being sold. This can be through a stock, or a non-stock sale (Warren et al, 2011). In the differences that exist between the GAAP and the IFRS on allocation of the purchase price, it is rather obvious that one favours the allocation of the purchase price of any business. The IFRS is not flexible since it requires fewer requirements to be satisfied for there to be a shift in a company’s assets. An example is the method of determining impairment of assets. In the IFRS, only one step approach is required. While under the GAAP, there must be a two-step approach. Here, the requirements are that the company must take a recoverability test, and then calculate the allocation price of the said items (Warren et al, 2011). With the two step approach that the GAAP uses, it is fairly easy to know of the market value that the asset is worth. Here, the company is likely to benefit from the selling of their asset. Due to the above, the GAAP is likely to be favoured when it comes to allocation of the purchase price. The standards are more flexible to accommodate the needs of the many groups that advocate for its use. The IFRS does not rightly justify the worth of the properties acquired. This is because, during the procurement, the impairment loss of the asset is calculated by the amount which the carrying value of the asset has, usually exceeding its recoverable amount. This prevents the company that has placed an allocation price from making gains in selling of their assets (Warren et al, 2011). Discussion 7 The equity method dictates that the investment of assets is in common assets. They require that the common stock be initially recorded at cost. This is then increased or decreased. This depends on the investor’s share of the investee’s income and/or loss. It later requires that all this is decreased by all the dividends received from the party that is investing in the said assets. Market value accounting methods only require that the value of assets be calculated according to the price of the assets (Warren et al, 2011). This is with no decrease in dividends of the investor’s income, or investee’s income or loss. Under the equity method, it is likely that there is a necessity to alter the worth of the investment account. There is also a need to amortize the difference that exists between an investor’s cost of initial acquisition, and their share of book value. This is with regard to the investee’s market value during the period of purchase (Warren et al, 2011). This is what makes the market value method superior to book, or equity method. In trying to find the value of an asset, market value is the way for investors to go about acquiring assets. Using market value accounting method, it is easier for investors to get value for their capital. This is in terms of the asset(s) available. Should the book values be used, it is highly likely that under the GAAP and IFRS requirements, and their differences, the value of the asset available may be misappropriated (Warren et al, 2011). It is such rationale that makes an investor opt for the market value method. They could find the correct pricing for the asset; hence paying the correct amount of capital for the asset. Discussion 8 FirstRand Limited is a company that is an authorised financial and credit service provider. A branch of the South African company recently began being represented by a Kenyan office. This was due to the muted growth the branch was experiencing. In order to maintain its clientele from Africa, and also abroad, the change needed to be done. Under current GAAP standards, contracts should be classified under liabilities, or equity, or as assets. They need to be classified since they may be difficult to understand, and/or apply. Under proposed GAAP, the common stock can be qualified as equity. Therefore, it may be easier for the company to change office. In the proposed GAAP, the company may be required to ascertain some of the assets under its name. From the current GAAP, it is understood that, under basic ownership, an organization or company may classify stock as a liability (Warren et al, 2011). This is different from the current GAAP that states that such equity classifications can be classified under contracts. The process that involves changes in ownership varies. The greatest challenge that is posed by some of these processes would be derecognizing of assets, and goodwill of the subsidiary at their carrying amounts. This is when control of the investment is lost. For many companies, this would be the greatest challenge. This is as many would want to keep some of their properties in the occurrence they tend to lose control of an investment to another investor (Warren et al, 2011). The rationale behind this process would be that, derecognizing the carrying amount due to loss of control can be of great disservice to any company. Discussion 9 General Motors is one company that filed for bankruptcy some time back. One of the reasons was due to the legacy costs the company was facing. These are the costs the company incurs when it caters for the pension, and medical care of its retired workers. This, topped up with other factors, such as poor performance, led to the company filing for bankruptcy. This was in comparison to other motor industries that were striving to produce high quality cars. Contractual agreement is a reaffirmation agreement that states one will continue to make payments toward a debt. This is either written down, or done in the presence of witnesses. Failure to honour the said terms of the agreement may result in severe consequences, for example, law suits (Warren et al, 2011). In the case of the General Motors industry, re-evaluating their labour agreement might have helped them reduce the chances of bankruptcy. The rationale behind this is, if they reduce the amount of money they pay their employees per hour, they might have set aside some money. When an organization is no longer capable of meeting their financial obligations, this is termed as insolvency. Accounting insolvency does not necessarily mean that an organization is bankrupt (Warren et al, 2011). Accounting insolvency occurs when the total liabilities of an organization, exceed its total assets. In the process of accounting for insolvencies, a company may restructure its payments. Restructuring payments could be an improvement in the organization. This is since the organization may be better placed to deal with any matters that may rise in the organization. In the accounting books, they might be able to make monthly payments, and thus, make their profits while running their organization (Warren et al, 2011). Reference Warren, C. S., Reeve, J. M., & Duchac, J. (2011). Financial and managerial accounting. London: Macmillan Publishers. Read More