International Financial Reporting Standards Narrative Essay Example

Accounting Principles, as required by the United States. This change could cause an imbalance in the stock market due to potential variations in accounting rules between countries. While the norms of GAAP and IFRS are similar in some ways, there are differences to note. IFRS is principle-based and relates details to the economy, requiring more explanation. Conversely, GAAP is based on more rules which can be difficult to comprehend at times.

According to IFRS rules, the statement of other gains and losses should be presented in a separate statement and any changes should be highlighted in the Statement of Changes in Equity. In contrast, GAAP allows for a separate statement for gains or losses, or they can be combined with the Statement of Changes in Equity at the end of the accounting period. LIFO method is not allowed in IFRS, but permitted in GAAP. IFRS allows for revaluations of intangible assets that are acquired from third parties in some cases, whereas GAAP does not allow for revaluations. Both IFRS and GAAP require financial statements including balance sheet, income statement, cash flow statement, changes in equity, and accounting policies and notes; however, IFRS requires 2 years of financial statements while GAAP requires 3 years of all components except the balance sheet.

•IFRS does not prescribe a specific format for the balance sheet, but requires reliable and relevant information with descriptions. In contrast, GAAP mandates a defined structure for the balance sheet, which must be arranged in order of decreasing liquidity and can be either classified or non-classified. While there is no standard format for the income statement according to IFRS, expenses must be presented either in function format

categorized by tasks like sales and marketing, administration and general, research and development etc or in nature format organized by categories such as purchases, salaries, rent etc. By comparison, the income statement under GAAP follows a standard format for presentation, with expenses always presented in function format.

According to Baker, Ding, & Stolowy (2005), the income statement format in North America follows a function format, while in some European countries (including Italy, Spain, and France) the nature format is more common. Additionally, there are some differences between IFRS and GAAP requirements for financial statements. IFRS prohibits extraordinary items from being presented in financial statements, while GAAP requires their inclusion. For example, negative goodwill is considered an extraordinary item under GAAP and must be included in the income statement. Changes in shareholder's equity do not need to be presented in IFRS but can be disclosed separately. However, both changes in equity and comprehensive income must be presented as a primary statement or combined with the income statement or statement of changes in equity. Finally, IFRS does not exempt cash flow statements under any circumstances, while GAAP has limited exemptions for certain investments and entities.

According to a comparison of IFRS and US GAAP from 2007, under IFRS, assets and contingent liabilities are valued solely on fair value while under GAAP, contingent liabilities may be valued using fair value or reasonable estimation. Additionally, biological assets are measured as the difference between fair value and estimated point of sale cost under IFRS whereas they are generally measured at historical cost under GAAP. Finally, research and development cost is capitalized under IFRS and expensed under GAAP, allowing companies to show less

income and save on taxes. Due to the numerous differences between the two standards, companies may be analyzed differently in different countries.

The financial state of a company can differ based on the type of financial statement being examined, including factors such as their liquid funds, profitability, and debt. Depending on the accounting standards used, investors may have differing views on the same company. (Beuren, Hein, ; Klann, 2008). However, both standards mandate that intangible assets must be capitalized and amortized if certain criteria are met.

Both IFRS and GAAP present interest expense on an accrual basis using the effective interest method and utilize historical cost for Property, Plant and Equipment. If the functional currency is not used under both standards, currency translation is done according to the exchange rate at the transaction date or at the average rate if rate fluctuations are not significant (Similarities and differences: A comparison of IFRS and US GAAP, 2007). Adapting International Accounting standards will allow companies to provide more informative and consistent financial reports that are easily understandable and of high quality. This will benefit businesses operating in multiple countries by allowing them to follow one accounting rule to create financial statements in different countries and expand their business network with a unified direction.

(IFRS: What is causing change?) The adoption of International Accounting Standards will enhance internal communication, reporting quality, and group decision-making within the company. IBM, for instance, has different accounting rules in various countries where its subsidiaries operate. Implementing international accounting standards will facilitate consistent accounting practices across all countries, leading to greater operational efficiency.

Implementing a systematic approach to financial statement preparation and reporting investment property fair

value measurement under IFRS can reduce complexity and penalty risk. Not depreciating investment property and land, which appreciation over time, avoids amortization cost.

This will benefit the real estate business by increasing the sales (Agarwal, 2008) and reducing the cost of capital for companies through the use of a standardized accounting system. Once IFRS becomes mandatory worldwide, professionals in different countries will require less training as accounting standards will be the same globally. IFRS emphasizes disclosure explanations rather than following too many rules, which could lead to more mistakes. Therefore, accounting accuracy will improve with fewer errors.

Cash planning will be enhanced with the increase in dividends paid by companies. Previously, subsidiaries used to provide dividends to the parent company, which distributed them based on profits. With the adoption of IFRS, companies will provide dividends directly, simplifying treasury management. This will benefit investors by making comparisons easier and broader.

By adopting IFRS standards, the world's economy can benefit immensely, with a globalized and standardized stock market operating under a single format. Such a system would facilitate transparency and informed decision-making, and attract foreign investors from all corners of the globe. (International financial reporting standards for U.S.)

The challenges and necessary steps to change financial standards have been revealed by the accelerating trend in companies worldwide (2007). This is a complex process that requires thorough consideration of multiple factors, particularly since different countries have their own unique laws and tax regulations. Therefore, it is crucial to address all issues before implementing this significant transformation.

Prior to implementing IFRS, it is crucial to address specific concerns and take appropriate actions. The variability of regulatory procedures across nations poses a significant obstacle

as this leads to varying contract specifications for IFRS. For example, some countries mandate printed versions while others stipulate handbooks or alternative formats. Despite the potential modification of standards, modifying laws for each country is impractical.

It is important to honor each country's process and create contracts that maintain consistency. One challenge countries may encounter is the cost of adopting IFRS, which varies based on their income level and the extent of necessary changes to their accounting standards (Creighton, 2008). Moreover, transitioning accounting standards will impact tax filing systems in countries.

It may create issues for tax filers in countries that follow GAAP and calculate inventory using the LIFO method, as IFRS does not use this approach. Before making any changes, local tax filings should be taken into account. Employee training on the new standards will also be necessary. Initially, it may be difficult as individuals are accustomed to old standards; however, subsequent costs will be lower as employees will have the skills to work for any company worldwide. (Considering IFRS?, 2006)

Every bank has specific loan rules for companies, which can be problematic for businesses following IFRS, as fair value calculation may result in lower profits. Banks should be flexible and consider these rules before implementing changes. The increase in international trade, multinational companies, and foreign investments necessitates globalized accounting practices. Therefore, IFRS is crucial in today's financial world. Although many countries may face challenges in adopting this new standard, it will ultimately lead to international market success and easy investor access across borders.

Like any situation, there are pros and cons to every standard, including IFRS adoption. While it can help companies globalize, potential drawbacks on the

economy should also be considered. For example, under GAAP rules, Enron's large accounting scandal damaged the entire company because of strict black-and-white regulations. In contrast, if they had used IFRS principles-based guidance instead, the SEC may have taken longer to detect fraud. Therefore, while IFRS benefits businesses in some ways, it can also increase their opportunity to commit fraudulent acts.

According to a report by Duquesne University (2006), the introduction of fresh accounting regulations can bring favorable effects to the worldwide economy if nations recognize and handle any challenges that may arise throughout the process. The report pertains to how accounting is defined.

The website http://www.business.duq.edu/programs/accounting/about.htm provides information on the BSBA program in Accounting. The retrieval date was October 10, 2008. Additionally, the article titled "IFRS: What is driving change?" is published by Ernst ; Young, a company that values quality in all aspects of their work.

The source of the information is http://www.ey.com/global/Content.nsf/Canada/AABS_-_Assurance_-_IFRS_-_Why_IFRS, and it was accessed on October 10, 2008. The information was provided by Beuren, I. M. and Hein, N.The text within the states that Klann, R. C. (2008) evaluated the effects that IFRS and US-GAAP had on something.