Cost and Benefit of IFRS, Essay Example

Costs

The fact of transparency of the IFRS as compared to the U.S GAAP is due to the methods taken by the two standards. While the basis of IFRS is on accounting principles, the U.S GAAP bases its principles on rules. The availability of many rules in the U.S GAAP ensures that there is little room for interpretation, and thus ensure that the results will be more transparent as compared to the use of accounting principles. The use of professional judgment as contrasted to the use of rules compromises the transparency, as is the case of IFRS. IFRS discourages financial engineering while in using guidelines provides an approach to interpret the implementation and always based on large economies.

Because the foundation, of IFRS dependence on judgment it becomes accessible for individuals to manipulate the account to show what they want to show. The application of these principles is solely on judgment, and the risk of fraud in financial statements through manipulations is rife. The objective of IFRS is to assess the substance of transactions and determine the accounting principles that reflect the real economic value (Shamrock 76). The basis of determining fair value is subject to manipulation as the individuals responsible determine the reliability of these measures. The use of IFRS requires good faith in making estimates and judgments. Companies can manipulate the IFRS systems by including what they desire only in the records and leaving out what is undesirable. Profit manipulation hides the true and fair position of the company leaving the investors with undesired outcome and false records (Bellandi 54).

The accounting for revenue in the German GAAP requires the recognition of unrealized losses while unrealized gains left out while in the US GAAP the two are equally recognized.  Concerning taxation the German GAAP allows for the authoritative principle where the financial statements determine the tax base while the US GAAP the company’s financial reporting cannot have a connection to tax circumstances (Hennie, and Marius 90).

The carving out IFRS by some countries becomes available where the policy allows a choice of an accounting policy and the country may resolve to adopt a different policy from the others. The carving out also arises from the differences in the interpretation involving the use of estimates. Peter notes that these carve outs result from the convergence of the IFRS standards to the local standards (97). The gaps between the IFRS and the converged versions bring about the carve outs. The carve outs involve the convergence of the local GAAP with the IFRS at a common point. This is where the IFRS take some provisions of the GAAP and the GAAP incorporates within its policy some aspects of IFRS. The carve outs can be adopted with gradual modifications in the IFRS to facilitate a smooth transition to the IFRS system. Countries that have adopted this system include Japan, India, the E.U and the US (Bellandi).

Benefits

Whereas according to the IFRS the concerned entity should prepare and disclose information that is comparative in respect of the information in the financial statements, the GAAP does not require this information although it is desirable. While the presentation of IFRS require for items that must be included at the presentation of on the financial statements the presentation of GAAP is silent on this requirements.,  The requirements necessary to accompany IFRS include items showing the amount of property, assets, investments, inventories, receivables and liabilities.

While, in the GAAP, the companies in question are free to use either the (LIFO)  last in first out and (FIFO) first in first out the LIFO inventory function is not available in the IFRS. The approach taken by the IFRS is a control model while the GAAPO approach is a risk and reward model. The IFRS allows for the capitalization of some costs subject to the use of some criteria while the GAAP holds this as an expense regardless of the criteria applicable. The titles of the financial statements in the GAAP follow the format of the cash flow, balance sheet, retained earnings, and income statement while the IFRS uses a comparative order like statement of changes in equity, statement of comprehensive income and statement of financial position (Irene).

Despite of the divergence of the approaches taken by the two types of financial statements, the investors can obtain the information they require from either of these statements due to the convergence of some their aspects. The financial information in the two systems has the same set of information, which are statements which show the company’s financial position and the flow of money in the company. The two systems acknowledge that loses and gains are outflows and inflows into the organization (Hennie, and Marius 90). The investors get the information they want although the presentations may vary the content remains the same. The similarities between the two systems allow for the future standardization of the accounting standards.

The SEC allows companies to submit IFRS statements without restating them in the US GAAP because the information present in the IFRS documents is sufficient to make investment decisions due to the compatibility of the IFRS system with the US GAAP system. The divergence of the two systems also presents additional information to the investors depending on the business involved. The reduction of the cost of investment and increasing the quality of information presented by the financial statements is a primary benefit to the investors. The improved reporting guidelines improve transparency and facilitate investment. The convergence of the two systems provides a single system providing a single standard across the economy.

Works Cited

Bellandi. F. The Handbook to IFRS Transition and to IFRS U.S. GAAP Dual Reporting. John Wiley & Sons, 2012. Print.

Irene, M. Wiecek, and Nicola M. Young. IFRS Primer International GAAP Basics. John Wiley & Sons, 2009. Print.

Peter, J. Walton. An Executive’s Guide for Moving from Us GAAP to Ifrs. Business Expert Press, 2009. Print.

Shamrock Steven E. IFRS and US GAAP: A Comprehensive Comparison. John Wiley & Sons, 2012. Print.

Hennie Van Greuning, and  Marius Koen. International Accounting Standards: Practical Guide. World Bank Publications, 2001. Print.