Question

In: Accounting

1. Your Understanding of the IASB? 2. A comparison of FASB and IFRS for at least...

1. Your Understanding of the IASB?

2. A comparison of FASB and IFRS for at least two standarsd?

3. Benefits and Costs to adoption of IFRS?

4. Arguments for and against the adoption?

Solutions

Expert Solution

1)

IASB stands for International Accounting Standards Board. The basic purpose of the IASB Framework is to provide assistance and guidance to the IASB in developing new or revised standards in addition to assisting the preparers of financial statements in applying the standards and dealing with issues which are not explicitly dealt with by the standards. However, the framework does not have the force of a Standard. Therefore, in case of a conflict between the Framework and the Standard, Standard will prevail over the Framework.

Under the IFRS Foundation Constitution, the objectives of the IASB are: to develop, in the public interest, a single set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles.

2)

The FASB framework is similar to the IASB framework in its purpose to assist in developing and revising standards, but it resides at a lower level in the hierarchy- a very important difference. Under IFRS, managements is expressly required to consider the framework if there is no standards of interpretation for that issue. The FASB framework does not have a similar provision. Although the U.S. GAAP framework recognizes the importance of the accrual and going concern assumptions, these are not given as much prominences as in the IASB framework. In particular, the going concern assumption is not well developed in the FASB framework .

Inventory Methods

Under GAAP, a company is allowed to use the Last In, First Out (LIFO) method for inventory estimates. However, under IFRS, the LIFO method for inventory is not allowed. The Last In, First Out valuation for inventory does not reflect an accurate flow of inventory in most cases, and thus results in reports of unusually low income levels.

Development Costs

A company’s development costs can be capitalized under IFRS, as long as certain criteria are met. This allows a business to leverage depreciation on fixed assets. With GAAP, development costs must be expensed the year they occur and are not allowed to be capitalized.

Intangible Assets

When it comes to intangible assets, such as research and development or advertising costs, IFRS accounting really shines as a principle-based method. It takes into account whether an asset will have a future economic benefit as a way of assessing the value. Intangible assets measured under GAAP are recognized at the fair market value and nothing more.

3)

Key benefits of IFRS,

1. It benefits the economy by increasing the growth of its international business.

2. By encouraging the international investors to invest, it leads to more foreign capital flows to the country.

3. Financial statements prepared using a common set of accounting standards help investors better understand investment opportunities as opposed to financial statements prepared using a different set of national accounting standards.

4. It offers accounting professionals more opportunities in any part of the world if same accounting practices prevail throughout the world.

Costs to adoption of IFRS,

1) It requires high costs.

2) It is prone to manipulation.
As businesses can only use the methods that they wish, this would lead to financial statements show only desired results, which can lead to profit manipulation. While this new set of standards requires changes to how the rules should be applied to be justifiable, it is often possible for businesses to come up with reasons for making such changes.

3) It is not globally accepted.
Truth is, the US has not yet adopted the IFRS, so as other countries that choose to continue holding out as well. This means that accounting by foreign companies operating in these countries are facing difficulties because they have to prepare financial statements using such a set of standards and another set of principles that is generally accepted in these countries.


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