Question

In the interactive lecture materials for this module, you read articles and materials and watched various videos, which described the history of the convergence process between the US GAAP and IFRS, including the status of convergence today. You also reviewed readings showing the differences that still exist today between US GAAP and IFRS on various accounting subjects. Below is a list of some particularly significant accounting topics or subjects where differences still exist today between the US GAAP and IFRS: inventories goodwill and other intangible assets contingencies accounting for income taxes including uncertainty in income taxes impairment of long-lived assets to be held or used or to be disposed of by sale research and development ‘development’ expenses. Select one of the above accounting subjects, preferably a subject personally or professionally interesting to you, and answer the following questions related to that topic in your initial response. Copy and paste each question below in bold type in your initial response to ensure that you answer each question. The subject line of your initial posting should be the accounting subject you have decided to address (for example: Inventories): Briefly explain the reason this subject was of interest to you. Describe, in an appropriate level of detail, the major differences that exist today between US GAAP and IFRS for that subject. Research if any progress has been made to date on converging the accounting and/or the financial reporting for that subject between the FASB and the IASB. If so, describe the progress, and if not, describe why progress has not yet been made, either from your research or in your opinion or both. Provide the class with a specific and detailed computational-based example of how the differences in the accounting and financial statement treatment of this subject could potentially affect the comparability of both the balance sheet and the income statement prepared under US GAAP and IFRS. State your opinion on whether you believe the FASB and the IASB eventually will reach convergence on this subject, and why or why not. Include an explanation of your opinion and what might be some other considerations preventing or delaying convergence on this subject.

Answer 1

Accounting Subjects : Inventories.

There is no specific reason to select this particular topic related to inventory. I was just curious to know more about Inventories and how they will be treated if convergence happens

Both U.S. GAAP and IFRSs define inventories as assets that are

(1) held for sale in the ordinary course of business,

(2) used in the process of production for sale, or

(3) materials or supplies to be consumed in the production of inventory or in the rendering of services. The cost of inventory under both U.S. GAAP and IFRSs generally includes direct expenditures of getting inventories ready for sale, including overhead and other costs attributable to the purchase or production of inventory

IAS 2 includes specific scope exceptions for

(1) inventories held by producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realizable value in accordance with well-established practices in those industries, and

(2) inventories of commodity broker-traders who measure their inventories at fair value less cost to sell. Under U.S. GAAP, similar guidance is provided in ASC 905-330, which allows for measurement of inventories at net realizable value in certain circumstances in the agricultural industry; and ASC 940-320-30-2 and ASC 946-10-15-2, which allow for measurement of certain inventories at fair market value in the financial services industry

Differences for Inventories that exist today between US GAAP and IFRS:

Measurement of carrying value:

US GAAP: Lower of cost or market.

IFRS: Lower of cost or net realizable value.

Costing formula:

US GAAP:The same formula used to determine the cost of inventory does not need to be applied to all inventories that have a similar nature and use to the entity.

IFRS:The same formula used to determine the cost of inventory must be applied to all inventories that have a similar nature and use to the entity.

Asset retirement obligations (AROs):

US GAAP: An ARO that is created during the production of inventory is added to the carrying amount of the property, plant, and equipment used to produce the inventory.

IFRS: An ARO that is created during the production of inventory is accounted for as a cost of the inventory in accordance with IAS 2 and may be added to the carrying amount of the inventory.

Accounting methods

US GAAP : First-in, first-out (FIFO); last-in, first-out (LIFO); weighted-average cost; and specific identification are acceptable accounting methods for determining cost of inventory.

IFRS: FIFO and weighted-average cost are acceptable accounting methods for determining cost of inventory; LIFO is not permitted. The specific identification method is required for inventory items that are not ordinarily interchangeable and for goods or services produced and segregated for specific projects.

Reversal of write-downs:

US GAAP: Write-downs taken to reduce inventories to the lower of cost or market may not be reversed for subsequent increases in value.

IFRS: Write-downs taken to reduce inventories to the lower of cost or net realizable value are reversed for subsequent increases in value

Current Status of Convergence:

According to current SEC comments the task of convergence is on hold; there is a continuing convergence plan that is happening and is being led by the SEC.

Two issues about IFRS that complicated the convergence project:
1. IFRS is more conceptual than a rules based body of thought. US GAAP was like this 25 years ago, practioners lobbied for clearer definitations and more concrete guidance....their success is where we are today.
2. IFRS is not the promulgated body everyone believes. IFRS has not been adopted by every country. In other words, Japan and the UK still follow their own GAAP. Those two countries combined account fir 2/3 of the global flow of funds via the Footsie500 and the Nikkei stock exchanges.

The convergence is designed to create a common, consistent, comparable and reliable platform to evaluate company performance. However, all countries have to adopt the standard prior to a holistic and complete transformation taking place.

According to my opinion the processof converging is on hold as far as i have read till now beacuse

FASB and the IASB have short-term international convergence projects. The overall objective of these projects is to improve both U.S. generally accepted accounting principles (GAAP) and International Financial Accounting Standards (IFRS) while concurrently eliminating a variety of individual differences between U.S. GAAP and IFRS.

• Projects falling under the heading of “short-term convergence” are limited to those that would address differences outside the scope of a major project for which convergence around a high-quality solution appears to be achievable in the short term, usually by selecting between existing IFRS and U.S. GAAP.
• In the current phase, the FASB addressed five areas: inventory costs; asset exchanges; accounting changes; earnings per share; and balance sheet classification. Concurrently, the IASB has deliberated several issues in the short-term convergence project.

And also since different countries use their own standards it is becoming very difficult to converge all the standards and make one standard on Global level.