Question

Highlights the different models used for SMEs transactions, and discuss differences between the models and General Accepted Accounting Principles (GAAP).

Answer 1

Q.1 Highlights the different models used for SMEs transactions, and discuss differences between the models and General Accepted Accounting Principles (GAAP).

Answer :- Following are the different models used for SMEs transactions :

1. Retail to Customer, in Person :An in-person retail-to-customer transaction is one of the simplest forms of business transactions. It involves a customer going into a store, selecting items to purchase and buying the items using cash, check or a credit card. The retailer charges the customer a price based on the retail price of the items plus sales tax if applicable
2. .Retail to Customer, Not in PersonRetailers can also sell products to customers without ever interacting in person. Customers can order products from a catalog by calling the business, placing an order over the phone and paying for the retail price, applicable sales tax and applicable shipping charges. The product is then shipped to the customer in the mail.Customers can also make purchases from retailers online through the retailer's website or from another retail  website. Online transactions typically are paid for using a credit card or online merchant service like PayPal or Google Checkout. Again, sales tax and shipping charges often apply in addition to the retail purchase price.

3. Wholesaler to Retailer :Another type of business transaction is when a retailer buys products from manufacturer or wholesaler. Many retailers do not manufacture the products they sell. Instead, they buy products directly from manufacturers or wholesalers, then mark the prices up from what they paid to sell to customers to make a profit.

4.Business to Business : Many companies sell products or services to other businesses and exclude end consumer from the business model completely. For example, a company might sell cloud storage to other companies, which are virtual servers that power websites and other technology. The companies that purchase this cloud storage use it to store data from their website or other company data securely. The seller in this transaction (e.g., the cloud storage provider) markets its services to other businesses and often sells its services exclusively to the buyer for a set period of time. Transaction details are usually laid out in contracts or business agreements. Payment details vary from monthly invoices to other payment arrangements like quarterly or annual payments.

5.Wholesale to Consumer :Some wholesalers also sell products directly to consumers. Most of these transactions are done online from various wholesaler websites, or over the phone, since wholesalers rarely have warehouses open to the public for browsing and making purchases. These transactions are attractive to consumers because consumers are able to get lower prices on products that have not been marked up by retailers.

6.Consumer to Consumer :Consumers also are able to make transactions with one another. For example, if someone lists a car or other product or service in the classifieds section of a newspaper, another consumer can buy that car directly from the seller. These transactions typically do not involve wholesalers, retailers or other business.Online auction sites and classified sites have made this model even more popular since people have more resources to buy and sell things between other consumers. In-person transactions are often in cash, while online sites typically use online merchant services.

Let’s look at the 10 biggest differences between the models  and GAAP accounting :-

• 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.
• 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.However, convergence projects between FASB and IASB have resulted in new GAAP and IFRS standards that share more similarities than differences. For example, the recent GAAP standard for revenue from contracts with customers, Auditing Standards Update (ASU) No. 2014-09 (Topic 606) and the corresponding IFRS standard, IFRS 15, share a common principles-based approach.
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.Understanding these differences between IFRS and GAAP accounting is essential for business owners operating internationally. Investors and other stakeholders need to be aware of these differences so they can correctly interpret financials under either standard.