Financial Statement from GAAP to IFRS
Financial statements are prepared either in GAAP or IFRS. The translation of the financial statements from GAAP to IFRS implies that items within the incomes statement as well as the balance sheet will be treated in a different way. The items within the income statement and the balance sheet are treated using different rules and approaches under the different accounting approaches. The item selected in this analysis that I will be specifically addressing is inventory. The convergence between GAAP and IFRS is a substantial undertaking and will influence business operations in the future. With respect to inventory, it appears that there are two aspects of consideration. One the one hand, there is the exclusive and sole use of First-In, First-Out (FIFO) approach. On the other hand, there is the allowing of both the First-In, First-Out and Last-In, First-Out (LIFO) approaches. In the contemporary, GAAP is a rule-based system whereas the IFRS is a principle-based system. The key challenge encompassing convergence is coming up with a universal approach (Robinson et al., 2015).
Current Treatment under GAAP and the Codification Governing Treatment of Inventory
The codification governing the treatment of inventories under GAAP is ASC-330, which provides guiding principles on the accounting and reporting if inventory within the financial statements. The measurement of the carrying value of inventory is considered to be the lower of cost or market value. In line with this, the similar formula employed to ascertain the cost of inventory does not require to be applied to all inventories that are of the same nature and use to the organization. With respect to accounting methods, the codification allows First-In, First Out (FIFO), Last-In, First Out (LIFO), weighted-average cost, together with specific identification are all approaches that are allowed for the determination of the cost of inventory. The key aim in choosing a method ought to be select the one which, under the circumstances, most evidently mirrors the income within the accounting period (IAS, 2017).
Current Treatment under IFRS and the Codification Governing Treatment of Inventory
The codification governing the treatment of inventories under IFRS is IAS 2, which provides guiding principles on the accounting and reporting if inventory within the financial statements. The measurement of the carrying value of inventory is considered either through the lower of cost or the net realizable value. In contrast to GAAP, the...
…implies that if an entity uses the LIFO method for inventory valuation is employed, it means that convergence with the IFRS means that the inventory valuation approach has to be done using the FIFO approach that is used. Under the FIFO approach, it is the first batch of inventory that is sold first. On the other hand, under the LIFO approach, it is the last batch of inventory that is sold first. One of the key differences is that under the FIFO method, the returns will be higher and greater. In particular, FIFO increases the gross profit of entity owing to the fact that it matches the sales with the inventory products that are lowly valuated. In the end, this increases the gross profit of the entity and at the same time increases the net income. On the other hand, under the LIFO approach, the entity is forced to keep hold of older inventory for a lengthier period of time. The downside of this is that there is a greater likelihood of these inventory items becoming spoilt or damaged and also losing value. The impact of this is that the method causes a decline in the…
References
IAS. (2017). Inventories: Key differences between U.S. GAAP and IFRSs. Retrieved from: https://www.iasplus.com/en-us/standards/ifrs-usgaap/inventories
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial statement analysis. Hoboken: John Wiley & Sons.
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