Accounting Standards, Essay Example

International finance is continuously contributing to the economic development of nations around the world. Just about all of a nation’s resources are dependent on their financial situation as well as the financial situations of other nations. For this reason, the US multi-national corporations’ financial and accounting systems should adopt the International Financial Reporting Standards (IFRS).

Foreign currency translations in international finance are primarily governed under two comparable yet contrasting concepts, International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP).  There is an ever increasing drive for the globalization of a single set of universal accounting and financial reporting regulations, otherwise known as convergence. Over 100 countries currently translate foreign currencies under the guidance of IFRS. This is why it is important for any business desiring global expansion to learn how IFRS will impact their business. (Lemus, 2014)

The Securities and Exchange Commission (SEC) focuses on regulating whether the adoption of IFRS by US registrants should be permitted or even required. Although the SEC has not solidified any decisions on the use of IFRS by any US registrants, such activity is still in development. (Lemus, 2014)

Foreign currency matters related to GAAP are guided primarily guided under the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) Topic 830, titled Foreign Currency Matters regarding financial instruments. The IFRS issues guidance for foreign currency matters under its’ International Accounting Standards (IAS) 21 and 29. IAS 21 deals with the effects of changes in foreign exchange rates, while IAS 29 deals with the financial reporting in hyper-inflation economies. (McGladrey, 2012) (Lemus, 2014)

In the actual determination of functional currency, GAAP and IFRS use different indicators as stated above. Under IFRS, such indicators of functional currency are structured in a hierarchy; where primary and secondary indicators are considered. Contrasting, GAAP does not structure its’ indicators in a hierarchy matter. (McGladrey, 2012)

Hyperinflationary economies carry other major differences under GAAP versus IFRS. Under GAAP, the financial statements of hyperinflationary economies are pre-measured as if the parent company’s reporting currency was considered the functional currency. Any differences resulting from exchange rates are reported as income. Under IFRS however, the functional currency is retained in hyperinflationary economies. If there are any amounts in the financial statements that were not pre-measured using the current rate at the end of the reporting period, then those amounts are indexed under a general pricing index, which are then converted into the reporting currency at the current rate. The re-valuation of plant assets may refer to the process of adjusting values from book value to fair value. This process may occur considering that there are substantial economic fluctuations in the market. For instance, a building asset purchased 15 years ago may have depreciated in value, but then regained value overnight due to a real estate fluctuation. (Lemus, 2014)

Let’s first discuss how entities measure their assets, liability, income, and expenses under each concept. These accounts are measured in the entity’s functional currency under both IFRS and GAAP. However, IFRS uses slightly different indicators to determine their functional currency. For both concepts, transactions not denominated by functional currency of the entity are considered foreign currency transactions. In such cases of foreign currency transactions, exchange differences emerging on currency translation are primarily recognized in profits or loss. (KPMG, 2013)

The re-valuation of plant assets may refer to the process of adjusting values from book value to fair value. This process may occur considering that there are substantial economic fluctuations in the market. For instance, a building asset purchased 15 years ago may have depreciated in value, but then regained value overnight due to a real estate fluctuation.

For purposes of consolidation, financial reports from foreign operations are translated under the same methods for both IFRS and GAAP. First, both assets and liabilities are converted at the closing rate. Income and expenses are converted at the actual rates, where in some cases, the applicable average rate is used. Finally, equity components are converted using historical rates; this does not included current-year movements. Current-year movements are converted through actual rates. (KPMG, 2013)

Under both concepts, exchange differences that emerge from the conversion of financial statements from foreign operations are recognized through other comprehensive income or (OCI); and then accumulated in separate components of equity, which is called accumulated OCI.  Attributable amounts recognized as part of any non-controlling interests (NCI) are then allocated to it. (KPMG, 2013)

The entity can present financial statements in currencies other than the functional currency, which is known as a presentation currency. When the entity translates such financial statements into a presentation currency, they make use of the same method from translating financial statements from foreign currencies. (KPMG, 2013)

If the entity makes willing of an interest from a foreign operation that includes loss of control over a foreign subsidiary, then the cumulative exchange differences recognized in the OCIs are averted to either profit or loss. Partial disposals of foreign subsidiaries can lead to proportionate reclassification into NCI; this is without loss of control of the foreign subsidiary. This happens while other partial disposals lead to proportionate reclassifications to profits or losses. However, under GAAP, the proportionate reclassifications to profits or losses when business subsidiaries are in substance real-estate or oil & gas, or the entire OCI which was accumulated is reclassified to profits or losses when control is lost, may cause differences in results from IFRS. In such cases, the loss of control is considered a disposal, even if the entity maintains interest in their investees, similar to IFRS. Only unlike IFRS, a loss of adequate influence or joint control is considered a partial disposal when the entity maintains interest in the investee. (KPMG, 2013)

References

KPMG. (2013, November). IFRS Compared to US GAAP: An Overview . Retrieved from KPMG: http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Documents/IFRS-compared-to-US-GAAP-An-overview-O-201311.pdf

Lemus, E. (2014). The Similarities and Differences between the Financial Reporting Standards under United States. GAAP versus IFRS By Prof. Edel Lemus, M.I.B.A. Carlos Albizu University, United States Global Journal of Management and Business Research: D Accounting and Aud. Research Journal Publisher: Global Journals Inc., 14(3).

McGladrey. (2012). US GAAP vs IFRS: Foreign Currency Translation issues at a glance. Retrieved from McGradrey: http://mcgladrey.com/content/dam/mcgladrey/pdf/ifrs_foreign_currency_translation.pdf