Jeremy Poirier ACCT 401 12:30 Section

IFRS versus US GAAP

Inventories and Intangible Assets

Intro
I imagine the International Financial Reporting Standards (IFRS) and the United States Generally Accepted Accounting Principles (US GAAP) debacle dilemma to be very similar to the United States using the Customary System of measurement versus the International System of Units. The IFRS are a standardized set of accounting principles and interpretations that fit a broad number of scenarios and are used throughout the world. US GAAP on the other hand is a set of standards pertaining to the United States rules and regulations of financial reporting. The United States is not alone in practicing financial reporting using a method other than those stated in the IFRS guidelines. In 2008, 35% of the worlds accounting was accounted for in US GAAP while only 33% in IFRS. However, 22% of reporting countries have planned to adopt IFRS or were already partially using the standards. (Deloitte, 2008). Much like the customary system we are not alone in using our own type of measurement. Much like the use of the customary system, US GAAP is not inherently wrong or bad, it contains some extremely well rounded reasons as to why it is used in the United States. It is tailored to conform and fit with many specific United States rules and regulations regarding the conduction of business and financial reporting. It goes into much more detail on how to handle certain reporting issues particularly, within the United States. This allows all US companies to have specific criteria to base their financial reports off of. US GAAP rules are over 17,000 pages long versus IFRS which is only 2,000 pages long (Gill, 2007). With taxation laws and other regulations varying from different regions of the world to the next it only makes sense to me to have individual sets of accounting systemsstandards. However, I do feel that there should be a way to compare all sets of financial statements across the world. Something in the effect to converting inches to centimeters should be applicable to US GAAP and IFRS. In the following portion of this paper I will compare and contrast IFRS versus US GAAP in relation to accounting for inventories and intangible assets. I will start out with explaining the similarities and differences in reporting pertaining to these topics and I will also be including the pros and cons of each method. I will then touch on any proposed changes or merits regarding either financial reporting standard that may be in effect. Lastly, I will explain my own

thoughts on the IFRS versus US GAAP reporting debacledilemma. The word debacle does not fit here. Overall, the intro is ok. It has all the parts it should have, but the writing is just a bit rough. I think with a little editing/rewording you would have an excellent intro. The structure and details are there, it is just how it is constructed that needs some polishing.

Inventories
In regards to inventory, IFRS uses the lower of cost and net realizable value to determine valuation (KPMG LLP, 2012). In this case the cost should include all expenditures involved in getting the inventory ready to be sold. Inventory is valued using first-in, first-out (FIFO) or the weighted-average cost method. Other types of cost valuation may be appropriate in specific cases these include standard and retail costing methods. Costing methods are applied in the same manner among similar inventories. You kind of contradict yourself above. Think of what you are doing. First inventory is either produced or purchased. So you have the initial recording of the asset onto the books and the rules surrounding that. Then you have valuation in regard to period end reporting, cost flow assumptions surrounding the recording of cost of goods sold (meaning recording the cost of what you sold), disclosure requirements and tax implications of what you have recorded. US GAAP on the contrary measures inventories at the lower of cost and market. This is a conservative approach in valuing inventory and prevents overstating assets. The cost should similarly include all expenditures in obtaining the goods. Much like IFRS, inventory can be valued using FIFO and the weighted-average costing methods. US GAAP gives us one more option that is prohibited by IFRS and that is last-in, first-out (LIFO). The use of LIFO is prohibited by IFRS regulations (Ernst & Young LLP, 2011). Pros IFRS prohibiting the use of LIFO in the costing valuation of inventories is only one of the few examples in the differing accounting for inventories between the two standards. I look at this as being a positive aspect of IFRS. By narrowing down the options of valuations allowed, it gives a more uniform approach to identifying values. Sensibly speaking, valuing inventories in similar manners allows you to more easily compare any type of inventory to one another. This would make financial statements more uniform and easier to read. You should be required to value similar inventories using the same method. US GAAP marks to market prices to account for a loss in value in inventories. By valuing inventories at what they are actually worth versus historical costing, it allows for less of an overstatement/understatement of assets. For example, if you have a portion of inventory that is obsolete and lacks hardly any value to anyone then it should not be valued at cost since it is

inherently useless. IFRS similarly marks down the cost of their inventories using net realizable value. A discussion of why LIFO is or is not a valid costing method would be good. Is there any justification as to financial reporting for its use? Think beyond the ease of reporting, but think in terms of the impact to the financials and their accuracy and adherence to underlying principles. Cons Under US GAAP, you do not need to apply similar methods valuation of similar natured items. This allows more freedom to choose appropriate valuation. Some may say more freedom is a benefit or a good thing, however in this situation, I feel this would allow you to skew the values of similar natured inventories to benefit the organization. By not requiring similar reporting it would make it hard to get a clear picture of comparing different types inventories that should be represented in a similar way. Also under US GAAP, there is no reversal for the write-downs of inventories (Ernst & Young LLP, 2011). Once the value has been written down there is not an effective way to give it a value. In a sense this shows the conservative approach of US GAAP but it does not effectively show the true value of the inventory reported. For example, an inventory of grain could be in abundance one year due to ideal growing conditions, while the following year a natural disaster could cause an industry shortage. This could cause the grain in this example, to be undervalued due to the previous write-downs in comparison to the newly found demand for the inventory which should increase its inherent value.

Intangible Assets
Intangible assets are defined by both set of standards using the same definition, "An identifiable non-monetary asset without physical substance, it is identifiable if it is separable or arises from contractual or other legal rights" (KPMG LLP, 2012). US GAAP and IFRS also both agree that the measurement basis for intangible assets depends on how it was acquired. Intangible assets can generally be acquired as a part of a business combination, separately, or be internally generated. Some common examples of intangible assets are goodwill, trademarks, copyrights, patents, and franchises. In both US GAAP and IFRS, goodwill arises only from business combinations, much like we learned in class during our consolidations unit. Both standards amortize intangible assets over their measurable useful lives. Pros

US GAAP allows for different codification for the bases basis of valuing the cost of the assets. This allows different types of intangible assets to be accounted for differently. Intuitively this makes the most sense because from case to case there are going to be differences that can or should affect the value of the asset. This being a pro depends on your view of how much freedom should be given to accountants. IFRS allows the revaluation of intangible assets other than goodwill. Goodwill is valued at historical cost because it arises from a transaction so it makes sense not to revalue it. By allowing the revaluation of intangible assets it gives the financial statements a better representation of the actual carrying values.

Cons Generally IFRS initially values intangible assets at cost. This could cause issues because it may be extremely difficult to give a reasonable value to something that is intangible versus tangible. Also, this does not account for different types or forms of intangible assets. By accounting for these intangible assets all in the same manner it lacks the ability to discern the differences between them and it may not always make sense for them to be accounted for in the same way as one another. US GAAP does not allow revaluation of intangible assets (Ernst & Young LLP, 2011). This may cause a misstatement of assets. By understating the actual value carried by these intangible assets it will undervalue assets as a whole and vice-versa if they are overstated due to a loss in value from the initial cost given.

Convergence
In 2008, the Securities and Exchange Commission had released a plan that stated its commitment to a universal set of accounting standards to be used around the globe. Again, in 2010 they reaffirmed their position towards a globally accepted set of accounting principles. (PricewaterhouseCoopers, 2012) Since these two releases, however, there has been no real progress made in accepting a global set of accounting standards. Ultimately, I feel that if the United States does move towards an IFRS set of regulations it will still have to account for the differences in United States reporting. I feel that if the United States does opt to move towards a single, global set of standards then there will be quite the transitional and learning period for every public organization. It will take time to educate accountants towards these new sets of standards and procedures. Also, it will take time and

man power to change organizations internal accounting systems in order to account for the changes from US GAAP to IFRS.

Reflection
After researching US GAAP and IFRS I feel torn between which is the better of the two. On one hand, I am fond of the fact that US GAAP is much more specific in how to account for different situations pertaining to the United States laws and regulations. However, IFRS gives us a standardized way to account for everything across the board and allows us to be more creative in certain situations. Allowing more freedom to choose how to account for situations allows similar but different actions to be accounted for in different ways that could allow for manipulations but also a better representation of data in different situations. Either way in my opinion it is a no-win situation. We can either be extremely detailed and allow little freedom in determining how to account for situations or we can be loose in interpretations and in effect be at risk to the manipulation or misrepresentation of the financial records. Personally, I feel that IFRS would allow all organizations, world-wide to be viewed in the same way, in regards to their financial statements. In my opinion, our world is becoming more and more globalized every second of the day. With the globalization of public companies becoming more and more prevalent, there should be some sort of universally or internationally accepted accounting system to account for this. This will allow any type of investor from anywhere in the world to have a clear picture of the rules and regulations followed in creating the financial statements. This synergy will make life easier for everyone involved in the preparation and interpretation of different financial statements. Another positive aspect that arises from IFRS, is the commonality of one accounting system worldwide. This enables opportunity for an accountant to step in anywhere in the world and be able work. As a current accounting student and hopeful accountant (someday soon), I would love the idea of having the knowledge base to be an accountant anywhere within the world. This would also be an advantage for any diversified organization that has operations in multiple countries. This would make their accountants extremely universal and even more valuable assets anywhere within their organization and the world. Ultimately, if the decision were up to me, I would opt towards moving the United States towards using IFRS. Based on my preceding opinions I feel that the positives outweigh the negatives of adopting this new accounting system. The world is growing more and more globalized each day and we must accept this fate and jump on board with IFRS and the rest of the world to enact a universal set of accounting principles.

Conclusion
In conclusion, the United States is moving in the right direction by stating their intent in adopting the International Financial Reporting Standards. This will be a benefit to investors worldwide and get the globe one step closer to a universal set of accounting principles. In this report I have summarized the key differences in accounting for inventories and intangible assets within International Financial Reporting Standards and United States Generally Accepted Accounting Principles. I have laid out what I feel to be the pros and cons of each method in relation to these two topics. Also, I have explained the convergence plans between the two standards of accounting. I ended with my own reflection on the two standards and included my thoughts and opinions on where the United States should head in its accounting standards.

I would have liked to know your opinion on Inventory Valuation and why. Overall, you do a solid job of covering the topic you chose. It is a little rough of a read though. While you covered the GAAP and IFRS of the topic, it lacked the clarity I would have liked to see. Meaning would a reader totally get it, if they did not already have a pretty good knowledge base on the topic. I would say no. But that aside, overall you did a nice job.

References
Deloitte. (2008) Webcast, International Financial Reporting Standards February 20. Ernst & Young LLP. (2011). US GAAP Versus IFRS: Comparison. Ernst & Young LLP. Fosbre, A., Kraft, E., & Fosbre, P. (2009, NOVEMBER 1). THE GLOBALIZATION OF ACCOUNTING STANDARDS: US GAAP VERSUS IFRS. GLOBAL JOURNAL OF BUSINESS RESEARCH, pp. 6171. Gill, L. (2007, June 10/25/2013). IFRS: Coming to America. KPMG LLP. (2012). IFRS Compare to US GAAP. KPMG International. PricewaterhouseCoopers. (2012). IFRS and US GAAP: Similarities and Differences. PricewaterhouseCoopers. PricewaterhouseCoopers. (2013). IFRS Adoption By Country. PricewaterhouseCoopers.

Riordan, D., & Riordan, M. (2008). IFRS vs. US GAAP: A Sixty Minute Waltz in the Classroom. Harrisonburg: James Madison University.