Question

The International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB: www.ifrs.org) has been increasingly adopted around the world. The United States Securities and Exchange Commission (SEC: www.sec.gov ), in 2008, issued the publication: “Roadmap for the Potential use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by US Issuers”. This Roadmap presented necessary steps to be taken for US to adopt IFRS starting 2014 and to be completed by 2016.

Use the Internet and e-library to answer the following questions:

Discuss three differences between the IFRS and the US GAAP.

Do you think that the US is ready economically and financially to adopt the IFRS.

Discuss the potential effects (if any) of the IFRS on the quality of financial reporting in US. Do you think the quality of financial reporting in US will be improved with the application of IFRS?

Answer 1

1) The major differences between IFRS and US GAAP are presented below:

• Intangibles: Recording intangible is difference between IFRS and US GAAP. Under US GAAP it is reported as per fair value. While under IFRS the intangibles is reported only if there is an economic benefit envisaged in the future arising out of these intangible assets.
• Cost of inventory: As per IFRS standards, the LIFO (Last In First Out) method is not allowed. As per US GAAP though both FIFO and LIFO methods can be used.
• Writing down of inventory: Under US GAAP, the reversal of any write downs is not allowed. For IFRS though reversals are possible if certain conditions are met.

2) The US is definitely ready to adopt IFRS standards because US GAAP and IFRS are broadly similar in nature with only minor differences. Also US companies have robust financial systems which means easy and seamless transition to IFRS standards. Moreover adopting IFRS standards means that US companies can expand their businesses in other parts of the globe where the accounting standard is IFRS.

3) The basis of IFRS is principle based accounting. And thus there are certain issues which can be interpreted differently by different people. In spite of these differences, the IFRS is widely expected to improve quality of financial reporting because unscrupulous accountants can sometimes misuse the rule based US GAAP system, which won’t be possible under IFRS because of its principle based framework. Also adoption of IFRS framework would allow the US companies to expand globally in a more efficient manner due to wider acceptance of IFRS standards globally.