1.
Client X operates in the US currently and is planning to expand operations globally next year. As a result, management is considering preparing financial statements in accordance with IFRS rather than with US GAAP.
Client X contacted you for clarification and recommendations regarding the following issues:
o How the use of the LIFO method to value its inventories will be impacted if a switch to financial statements prepared in compliance with IFRS will be made.
o Whether interest cost on construction of a new warehouse may be included in the cost of the new warehouse.
o In what instances should goodwill be adjusted for impairment?
Provide a 150- word overview of each issue, followed by solid responses supported by research and proper citing.
SAMPLE
MEMORANDUM
To: Client X
From: Team C
Date: 07/15/2020
Re: Clarifications and Recommendations for Change from US GAAP to IFRS
______________________________________________________________________________
It is our team’s first priority to provide clarification and recommendations to you regarding your intentions of expanding operations globally. When considering to grow your business international as a marketing and growth strategy, having a strategic plan to launch is important for concerning the potential barriers and adjustments needed to make to the product and service contributions (The Entrepreneur’s Resource, 2016). Starting a global business may be expensive and foresight in having a beneficial plan of achieving this goal is imprudent not to avoid. This memorandum contains our findings concerning your questions with regards to adopting the International Financial Reporting Standards (IFRS) principle based accounting standard or the United States generally accepted accounting principles (GAAP) rule based framework for reporting financial statement standards, the construction costs, inventory valuation and its costs, and impairment testing of goodwill.
Impacts when Changing Mythology for Inventory:
For the treatment of inventory accounting, GAAP permits the use of “Last-in, First-out (LIFO), First-in, First-out (FIFO), or average cost” to determine inventory values (Kieso et al., 2016). Under IFRS, however, the LIFO method is not allowed, and Client X must use the average cost or FIFO valuation methods.
The average cost method prices a company’s inventory items using the average costs and “assumes that the cost of goods sold and ending inventory” include all products that it sells. “Average unit cost is weighted by the number of units acquired at the various unit costs during the period resulting in income and tax amounts between the LIFO and the FIFO inventory valuation methods” (IAS Plus, 2016). Under the FIFO method, the assumption is that beginning inventory sells before subsequent purchases. Although using this approach “results in a higher ending inventory, lower cost of goods sold and a higher gross profit” during rising prices than using the LIFO method, Client X will also pay higher taxes due to reporting a higher reported income (IAS Plus, 2016).
Construction and Interest Impacts to Financials:
There are a few things to consider when deciding whether to include the interest costs on the new construction of a warehouse. The first is the impact on the company’s financials. It is a choice whether to capitalized the expense so that it depreciates over a period or record it as it happens to increase the current expenses. The second consideration is the options available to account for the interest. The company can either forgo adding the interest costs; they can include only the interest that occurred while the warehouse was under construction or they can record all interest for the new building.
Goodwill Adjustments:
Goodwill shouldn’t be amortized but tested for impairment by the reporting unit. When the price of Goodwill goes above its assumed fair value, it is as a residual because it cannot be estimated directly. If the reporting unit’s carrying cost surpasses fair value Kieso, Weygandt & Warfield, 2016), it is considered impaired, and the process of testing the fair value of the unit under review and its implied goodwill must occur (Kieso, Weygandt & Warfield, 2016). CPA’s and CFO’s prefer the GAAP. GAAP are rules-based standards, and IFRS based on principles.
Conclusion:
With the passing of the Sarbanes-Oxley (SOX) in 2002, the United States Securities and Exchange Commission has been adopted international accounting standards to close the gap between GAAP and IFRS. The additional costs involved in adopting IFRS makes it more profitable to stay with GAAP. A change would directly impact the financial reporting and internal controls of a company. With the key financial decision makers of many organizations having these objections, it is hard to recommend switching standards at this time (Pologeorgis, 2016).
References
FASB Accounting Standards Codification. Retrieved from https://asc.fasb.org/glossarysection&trid=2144448
IAS Plus. (2016). Inventories: Key differences between U.S. GAAP and IFRSs. Retrieved from http://www.iasplus.com/en-us/standards/ifrs-usgaap/inventories
Kieso D. E., Weygandt J. J., & Warfield, T. D., (2016). Intermediate Accounting, (16th edition.) Retrieved from The University of Phoenix eBook Collection database.
Pologeorgis, N. (2016). The Impact Of Combining The U.S. GAAP And IFRS. Investopedia, LLC., Retrieved from http://www.investopedia.com/articles/economics/12/impact-gaap-ifrs-convergence.asp
The Entrepreneur’s Resource. (2016). Understanding the Basics of Expanding Your Business Abroad. Retrieved from http://entrepreneurship.org/resource-center/understanding-the-basics-of-expanding-your-business-abroad.aspx
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