Question

In: Accounting

What are some of the complexities in international practice for accounting versus the United States?

What are some of the complexities in international practice for accounting versus the United States?

Solutions

Expert Solution

  1. Local vs. Global

IFRS is used in more than 110 countries around the world, including the EU and many Asian and South American countries. GAAP, on the other hand, is only used in the United States. Companies that operate in the U.S. and overseas may have more complexities in their accounting.

  1. Rules vs. Principles

GAAP tends to be more rules-based, while IFRS tends to be more principles-based. Under GAAP, companies may have industry-specific rules and guidelines to follow, while IFRS has principles that require judgment and interpretation to determine how they are to be applied in a given situation.

  1. Inventory Methods

Both GAAP and IFRS allow First In, First Out (FIFO), weighted-average cost, and specific identification methods for valuing inventories. However, GAAP also allows the Last In, First Out (LIFO) method, which is not allowed under IFRS. Using the LIFO method may result in artificially low net income and may not reflect the actual flow of inventory items through a company.

  1. Inventory Write-Down Reversals

Both methods allow inventories to be written down to market value. However, if the market value later increases, only IFRS allows the earlier write-down to be reversed. Under GAAP, reversal of earlier write-downs is prohibited. Inventory valuation may be more volatile under IFRS.

  1. Fair Value Revaluations

IFRS allows revaluation of the following assets to fair value if fair value can be measured reliably: inventories, property, plant & equipment, intangible assets, and investments in marketable securities. This revaluation may be either an increase or a decrease to the asset’s value. Under GAAP, revaluation is prohibited except for marketable securities.

  1. Impairment Losses

Both standards allow for the recognition of impairment losses on long-lived assets when the market value of an asset declines. When conditions change, IFRS allows impairment losses to be reversed for all types of assets except goodwill. GAAP takes a more conservative approach and prohibits reversals of impairment losses for all types of assets.

  1. Intangible Assets

Internal costs to create intangible assets, such as development costs, are capitalized under IFRS when certain criteria are met. These criteria include consideration of the future economic benefits.

Under GAAP, development costs are expensed as incurred, with the exception of internally developed software. For software that will be used externally, costs are capitalized once technological feasibility has been demonstrated. If the software will only be used internally, GAAP requires capitalization only during the development stage. IFRS has no specific guidance for software.

  1. Fixed Assets

GAAP requires that long-lived assets, such as buildings, furniture and equipment, be valued at historic cost and depreciated appropriately. Under IFRS, these same assets are initially valued at cost, but can later be revalued up or down to market value. Any separate components of an asset with different useful lives are required to be depreciated separately under IFRS. GAAP allows for component depreciation, but it is not required.

  1. Investment Property

IFRS includes the distinct category of investment property, which is defined as property held for rental income or capital appreciation. Investment property is initially measured at cost, and can be subsequently revalued to market value. GAAP has no such separate category.

  1. Lease Accounting

While the approaches under GAAP and IFRS share a common framework, there are a few notable differences. IFRS has a de minimus exception, which allows lessees to exclude leases for low-valued assets, while GAAP has no such exception. The IFRS standard includes leases for some kinds of intangible assets, while GAAP categorically excludes leases of all intangible assets from the scope of the lease accounting standard.


Related Solutions

The United States was one of the leaders in pushing for development of international accounting standards....
The United States was one of the leaders in pushing for development of international accounting standards. Yet, despite the fact that so many U.S. corporations have offices worldwide, the United States has been reluctant to forgo GAAP; the text suggests there are still issues that need to be resolved. Are the issues the result of financial or cultural differences between the United States and other countries?
Discuss the international benefits of harmonization of the IFRS and the United States generally accepted accounting...
Discuss the international benefits of harmonization of the IFRS and the United States generally accepted accounting principles. Why is the analyst report important to an investor? What has been the impact of the key provisions in the Sarbanes Oxley Act on the way financial reports are currently done? Discuss the difference between rules based and principle based approach towards standard settings. Which method would you recommend and why?
What will be the economic implications of the United States versus China conflict in the coming...
What will be the economic implications of the United States versus China conflict in the coming years as the U.S and China come out of the Covid-19 pandemic? (essay form)
What are some of the current healthcare reform initiatives for the United States.
What are some of the current healthcare reform initiatives for the United States.
what are some references for this statement? There is no gender discrimination in the United States,...
what are some references for this statement? There is no gender discrimination in the United States, wages differentials are based on sound economic reasons.
What are some of the major changes in education in the contemporary United States?
What are some of the major changes in education in the contemporary United States?
What is the United States investment in Japans international Business structure like, and how has the...
What is the United States investment in Japans international Business structure like, and how has the US strengthened or weakened their place in international business?
What should the role of the United States be in Internet Governance? Do you think International...
What should the role of the United States be in Internet Governance? Do you think International Institutions can be helpful in global cybersecurity?
What policy underlies the corporate practice of medicine in some states and why is this policy...
What policy underlies the corporate practice of medicine in some states and why is this policy not universally followed in all states?
Consider the situation of United Airlines (UA), an international airline based in United States of America....
Consider the situation of United Airlines (UA), an international airline based in United States of America. As part of its business it is heavily exposed to fluctuations in the price of jet fuel and foreign exchange rates. It sells tickets in foreign currencies and has significant EUR costs. For either jet fuel costs or forex, evaluate one derivative product UA could use to hedge fluctuations in the underlying price. • Briefly describe how the product would be used to hedge...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT