Inventories and cost sales form a critical part of organizations
Question 1
Inventories and cost sales form a critical part of organizations in terms of financial statements. Various ways of inventory valuation pose a barrier in comparing companies. The different valuation procedures result in considerable differences in the inventory. There are two accounting frameworks in the U.S. The United States Generally Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRS). USGAAP is only applicable in the United States, while IFRS is used internationally. The two parameters provide a set of standard guidelines that one should follow in business accounting. IFRS allows the allocation of the cost of inventory to inventories and cost of sales using three methods. First-in, first-out (FIFO), weighted average price and specific identification.
International Financial Reporting Standards (IFRS) grant the task of stock costs (expenses of merchandise ready to move) to inventories and value of deals by three cost equations: definite recognizable proof, first-in, first-out (FIFO), and weighted ordinary expense. U.S. proper accounting rules (US GAAP) permit a similar three stock valuation strategies, alluded to as cost stream presumptions in US GAAP, yet additionally incorporate a fourth technique called toward the end in, first-out (LIFO). The decision of stock valuation strategy influences the portion of the expense of products ready to move to completion stock and cost of deals (Riccardi, 2016). Experts must comprehend the different stock valuation strategies and the related effect on fiscal summaries and similar money proportions to assess an organization’s exhibition after some time and comparative with industry peers. The organization’s budget summaries and related notes give essential data that the examiner can use in surveying the effect of the decision of stock valuation technique on fiscal reports and monetary proportions.
Question 2
Within the context of property, land and equipment, one of the most significant differences between IFRS and US GAAP is a below. IFRS allows entities to choose one of two models for reporting non-fixed assets for each class of property, plant and equipment. Examples include land and buildings, machinery, furniture and fixtures and office equipment. Cost models carry assets at their historical cost less accumulated depreciation and any accumulated impaired losses. Componentization is commonly used to refer to the requirement in paragraph 43 of IAS 16. US GAAP allows componentization, but it is not necessary, and neither is it widely used ((Gross, 2016). On the other hand, IFRS requires componentization. Generally speaking, IFRS give accountants more freedom to exercise their judgement than US GAAP. Under IFRS, the approximation techniques used is under the discretion of the accountant. US GAAP permits separate capitalization on items. However, the regulation is practically uncommon. For example, buildings are frequently capitalized as one asset and depreciated over 40 years using the straight-line method. For many entities, separating existing assets in the components for the initial transition to IFRS will be an enormous undertaking that is complicated by several factors. Businesses with buildings that were capitalized 30 or 40 years ago do not have records of individual structural components. The bottom line is that one should be keen on the rules of componentization.
Question 3
For more than two decades, asset evaluation practice has been rising. Bookkeeping is the act of resource assessment to establish their worth. The rise has been evident on the IFRS and GAAP of the United States. Both fronts ensure that accountants use fair value accounting model (FVM). Small businesses must understand the variation of the FVM on IFRS and US GAAP if they run international companies. Both sides practice similar guidelines for assessing the fair value (Gross, 2016). According to both sides, the price a seller receives if he or she has sold an asset in a transaction is the definition of fair value. The conventional approach in both sides is the use of income to change the future to present amounts. The purpose of the cost approach to assessing the current replacement value is also standard on both sides. Small businesses quickly adapt in both hands using these similarities. However, there are differences when it comes to eligibility of assets. IFRS allows FVM on some assets that US GAAP does not recognize. The system requirement for measuring the value of investment also differ on both fronts. A significant variation on how US GAAP and IFRS undertake fair Value accounting depends on the extent of guidance and attention to each guideline for asset valuation. GAAP has special regulations on the measurement of fair value. The specificity includes fair value hierarchy and overall advice on assessment. IFRS does not have specific rules for valuation procedure. It has limited regulations for appropriate values determination
Question 4
When it comes to borrowing cost, the scope varies between the two bodies. The US GAAP has a well-outlined guideline while IFRS does not. US GAAP has guidelines for specific chain companies that re different from what other organizations use. Under IAS 23, some inventories can be qualifying assets. The case is not right for US GAAP. Under IFRS, products that take longer to yield and can be produced in large amounts can be qualifying assets. An asset for internal use becomes a qualifying asset according to US GAAP. Getting costs has several aspects of differences when it comes to the two fronts. Leases on leases incorporate all contracts under IAS 23, however just fund rents under US GAAP Under IFRS 164, tenants by and large perceive all contracts on-monetary record and organizations presently underwrite qualified interest on any risk related liability. Under US GAAP, the new meaning of intrigue costs incorporates intrigue identified with a money rent decided under ASC 842
Question 5
Under the IFRS and US GAAP, the treatment of intangibles differ. The intangible include and not limited to goodwill and research. International Financial Reporting Standards recognizes intangible assets under one condition; they must have a future value. Through this assessment, the best asset is allocated a higher monetary value in comparison to the others (Lessambo, 2018). GAAP does not consider the additional future cost on intangibles. It instead gives a recognition of the current market value of the intangible assets. Both principles, however, share in the concept that intangible assets do not have physical substance. Goodwill is in the same category with intangible holdings if it is a part of a business. The balance sheet cannot bear an internally generated goodwill. All these are the common grounds of both regulatory bodies.
Issues with the first time adoption of IFRS
The financial statement of companies was becoming complex because accountants did not understand the system. It took so much time for the accountants to understand and fully implement the IFRS system. There was a debate about the purpose of standards, whether to view the technicality or think of their impacts. This problem ultimately rose to change management issues in various organizations. The change was necessary for terms of accounting language to get into the new system. The changes posed trouble to the small business that took some time to adjust accordingly.