GAAP to IFRS Case - Research Paper Example

 GAAP to IFRS Case Inventory Valuation Principles The most regularly argued distinction between U.S GAAP and the IFRS is how to treat the inventory costing. According to U.S GAAP LIFO (Last in First Out), assumptions are allowed which costs the most latest purchased inventory as a cost of sales first to be applied for inventory costing. As the costs seem to go up in majority of industries, this exercise leads into a higher costs of sales expense hence discouraging the income. However, majority of the firms in United States apply the LIFO technique since it shows the tax merits and based on an extraordinary rule of conformity, in case the firm applies LIFO in accounting for tax, it is obliged to apply the ruthless technique in financial accounting (Ciesielski, 2008). In IFRS, LIFO is not permitted in any way. For it to be used, SEC must look for an exception for the U.S companies an issue which the United States FASB (Financial Accounting Standards Board) does not allow with the exception that the Internal Revenue Service of United States does away with the rule of conformity (Ciesielski, 2008). Therefore, the U.S firms will be obliged not to continue with the LIFO method. Whilst the outcome will raise the net income, this will finally inconvenience the shareholders since the firms will levied more taxes that are corporate. The tax levy might be in million dollars for some selected big industrial companies and is perceived as a big obstacle to the adoption of IFRS (Ciesielski, 2008). Discretion in the Valuation of Assets IFRS offers the managers more prudence in the section of valuing asset as an entire good judgment that is probably able to improve the income of the firm. In this section of Research and Development expenses and the associated section of domestic intangible asset valuation, IFRS is more liberal compared to GAAP. IFRS permits costs of development as opposed to costs related to basic research, to be put in the assets of the firm and hence not be expensed over the profit. The United Stated GAAP emphasizes that all costs related research and development must be expensed with the exception in circumstances with exceptionally restricted industry specifics (Barth, Landsman, Lang & Williams, 2006). Using the GAAP, writing down the assets based on fixed reduction in value is a one-way technique. Upon writing down the assets, there is no other technique the asset can be written back albeit the industry or economic conditions get better. IFRS, on the contrary permits writing up and gives room for the company to recover the income. In addition, using the U.S GAAP, an asset acquired cannot be increased in value due to appreciation in the market. On the contrary, due to rarely used UK GAAP principle, IFRS gives assets to be revalued according to the market values on condition that the revaluation is done with standard pattern (Barth, Landsman, Lang & Williams, 2006). Nonetheless, the raise in the book value does not translate to an increase in the profit. Under IFRS, flexibility does exist in many sections of setting standards where more than one treatment of accounting is permitted even though normally one specific treatment is defined ad the standard treatment or preferred treatment. Illustration Suppose XYZ Company runs a freely transferable license of operation that was obtained on June 1, 2012 at an original value of $ 100,000. The license has a useful life of 5 years and the company applies the straight-line method to amortize the intangible asset. This type of license is traded regularly between the current operators. AT the date of financial position, 30 June 2013 based on the state permitted rise in the predetermined bus fares, the value traded on this license was about $130,000 while the accumulated amortization on 30 June 2013 was $ 40,000. The journal entries that replicate the carrying value variation are as follows under merging the U.S GAAP and IFRS. Case solution: Since LIFO is not allowed under IFRS, FIFO can be used. The divergence between FIFO and LIFO costs of sales is the discrepancy between the start of the year and end of the year degree of difference in the LIFO reserve (Camfferman & Zeff, 2007). In this scenario, the divergence will lead to a decrease in the cost of sales by virtue of a higher total of inventory using the FIFO in a figure of $ 3,333 ($ 23,333 less $ 20,000). The journal entry will be; The journal entry will be: 2012 US GAAP: Revaluation is not allowed. IFRS principle: Dr. Accumulated amortization $ 40,000 Cr. Intangible asset $ 40,000 Dr. Intangible asset $ 70,000 Cr. Revaluation surplus – intangibles (OCI) $ 70,000 The net effect is, the intangible asset has an adjusted carrying value of $130,000 ($ 100,000 – $ 40,000 + $ 70,000). A similar proportion might then again reiterate the accumulated amortization. 2013 US GAAP: Dr. Amortization expense $ 20,000 Cr. Accumulated amortization $ 20,000 IFRS: Dr. Amortization expense $ 43,333 Cr. Accumulated amortization $ 43,333 Dr. Revaluation surplus – intangibles (Operating license) $ 23,333 Cr. Retained earnings $ 23,333 There is need to recognize the appreciation in the assets as well critically realize that computation of depreciation on the new assets reported must be conducted. Moreover, the write-ups on the assets must also go to the comprehensive income statement as opposed to going to the retained earnings. It is from this point that the retained will be reported in the balance sheet statement (Camfferman & Zeff, 2007). It might have been challenging to report the $ 23,333 increase under FIFO yet it is significant to state or notice that the increase in value in the year 2013 will recorded on the comprehensive income statement. The revaluation from the years before, that is to say the LIFO reserve will be posted in the balance sheet statement and increase the value of the retained earnings (Camfferman & Zeff, 2007). Therefore, with the increase in the value of retained earnings, the value of the deferred income tax must be recognized and treated according to the principles of taxation. References Ciesielski, J. (2008). IFRS & GAAP: the Urge to converge. The Analyst’s Accounting Observer, 17, no. 4 Camfferman, K. & Stephen A. Zeff (2007) Financial Reporting and Global Capital Market: A History of the International Accounting Standards Committee 19732000, New York: Oxford University Press. Barth, Mary E., Wayne R. Landsman, Mark H. Lang, and Christopher D. Williams, (2006) Accounting Quality: International Accounting Standards and U.S. GAAP. Working paper, University of North Carolina and Stanford University. Read More