Determine the major differences between U.S. GAAP and IFRS disclosure reporting
ID: 2500445 • Letter: D
Question
Determine the major differences between U.S. GAAP and IFRS disclosure reporting requirements related to each separately reportable operating segment. Next, give your opinion as to whether either U.S. GAAP or IFRS disclosures provide financial statement users the most useful information for investment or credit decisions. Provide support for your choice. Speculate on at least three (3) accounting problems that exist under U.S. GAAP related to interim financial reports. Next, suggest at least one (1) approach to overcome each listed problem. Provide a rationale for your response.
Explanation / Answer
Inventory Valuation
US GAAP LIFO, FIFO, weighted average cost, or specific identification. Inventory carried at lower of cost or market.
IFRS FIFO or weighted average cost; LIFO not permitted. Inventory carried at lower of cost or net realizable value.
Impact that use LIFO must revalue inventory, which could result in major tax liabilities due to the IRS’s LIFO conformity rule.
Asset Impairment
US GAAP Two-step impairment.
IFRS Single-step impairment.
Impact Write-downs are more likely under IFRS.
Asset Valuation
US GAAP Assets can be written down, but not written up. PP&E is valued at historical cost.
IFRS Allows upward revaluation when an active market exists for intangibles; allows revaluation of PP&E to fair value.
Impact Book values are likely to increase under IFRS.
Revenue Recognition
US GAAP Provides very specific general and industry guidance about what constitutes revenue, how revenue should be measured, and the effect of timing on recognition.
IFRS Not specific about the timing and measurement of recognition; lacks industry-specific guidance.
Impact Revenues are likely to increase with less detailed guidance.
Contingencies
US GAAP Contingent liabilities must be disclosed.
IFRS Can limit disclosure of contingent liabilities if severely prejudicial to an entity’s position.
Impact May result in fewer disclosures.
Debt Covenants
US GAAP Permits curing debt covenant violations after fiscal year end.
IFRS Debt covenant violations must be cured by fiscal year end.
Impact Debt covenants may need to be amended, resulting in related transaction costs.
Research & Development
US GAAP R&D costs must be expensed.
IFRS Allows capitalization of R&D costs.
Impact Development costs will be deferred and amortized.
Entity Consolidation
US GAAP Consolidation is based on who has the controlling financial interest.
IFRS Consolidation is based on which entity has the power to control.
Impact Companies are likely to consolidate more entities.
Securitization
US GAAP Allows certain securitized assets and liabilities to remain off a corporation’s books.
IFRS IFRS requires most securitized assets and liabilities to be placed on the balance sheet.
Impact May result in very different balance sheet values.
Financial Instrument Valuation
US GAAP Fair value based on a negotiated price between a willing buyer and seller; not based on entry price.
IFRS Several fair value measurements. Fair value generally seen as the price at which an asset could be exchanged.
Impact Financial assets and liabilities will be measured differently.
Depreciation
US GAAP Methods allowed: straight-line, units of production, or accelerated methods (sum of digits or declining balance). Component depreciation allowed but not commonly used.
IFRS Allows straight-line, units of production, and both accelerated methods. Component depreciation required when asset components have different benefit patterns.
Impact Assets with different components will have differing depreciation schedules, which may increase or decrease assets and revenue.
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