International Financial Reporting Standards(IFRS) was developed by International Accounting Standard Board (IASB) as acommon language for accountants to report their financial informationconsistently around the globe.
IFRS is used by various countries, however, inthe United States, Generally Accepted Accounting Principles (U.S GAAP) is acceptedand followed. These are set by the Financial Accounting Standard Board (FASB).Many countries are trying to follow a universal standard, which is IFRS, inorder to increase consistency and ease financial reporting.
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The United Statesis as well is considering it. Securities Exchange Committees (SEC) have beentrying to work towards the convergence to IFRS from US GAAP. As Donna mentionsin her research that in 2007 there were many events where FASB and IASB agreedto work together. US President Bush signed an agreement that had a commitmentto promote US GAAP and IFRS. Furthermore, she states that, “In October 2007, theUS Senate Subcommittee on Securities, Insurance, and Investment held hearingsaddressing the acceptance of IFRS in the US” (Street 2008, p 200). IFRS and US GAAP have somesimilarities, but they are different in many aspects. One of the manydifferences between IFRS and US GAAP is that US GAAP is Ruled based where allfinancial transactions have to follow certain rules and regulations.
On theother hand, IFRS is Principle based where financial transactions does notrequire to follow specific set of rules. Collins in his article, Financial reporting outcomes underrules-based and principles-based accounting standards also mentions that, “Principles-based accountingstandards are typically characterized as containing clear statements of intentbut lacking detailed implementation guidance,while rules-based standards are generally characterized as providinggreater detail regarding implementation and compliance” (Collins 2012, p. 681). Other differences among these twostandards include the way they present their financial information forconsolidation, inventory valuation, revenue recognition, costs, and expenses. IFRS, as mentioned before, is a principallybased standard. Since accountants are not emphasizing more on specific rules,this saves them a huge amount of time and cost to prepare financial reports. Itis also much simpler than the US GAAP.
Furthermore, IFRS is a globally acceptedstandard, thus using such standard will increase comparability among investorsand financial users globally. Above all, IFRS will increase transparency for USstakeholders which can act as a motivation to improve performance and increasedefficiency (Ball 2006, p. 12). There are many other advantages of using IFRSover US GAAP; however, in this paper, I will focus on how adopting IFRS canaffect net income positively by reducing costs and ending inventory. Therefore,if U.
S companies will adopt IFRS, then ending inventory and costs will be reduced,resulting in increased net income. Reviewof literature The adoption of IFRS in UnitedStates has been a hot topic and many accountants and scholarly individuals havedone research on it including Street, Donna L. Her research on ‘The Impact in the United States of GlobalAdoption of IFRS’, explains how IFRS adoption can effect United stated. Shealso mentions how IFRS adoption has been a slow acceptance in United States. Shediscusses pros and cons of adopting IFRS by the United States. Out of many advantagesshe mentioned, one of them is that by adopting IFRS, US companies can avoid competitivedisadvantage in terms of revenue recognition in technical industry.
Byfollowing IFRS, US tech companies can record revenue sooner than US GAAP. Recordingrevenue sooner will definitely raise net income for the current period, shortterm benefit. Despite the fact there are numerous advantages including raisednet income, yet the United States have still not adopted the uniformedstandard, IFRS. Moreover, according to her, “The US accountants and auditorsare not adequately versed in IFRS” (Street 2008, p 203). She concludes, in herarticle, by stating that IFRS needs to be improved before an adoption by the US.Hence, there is still room for more debate and discussion regarding IFRSadoption by US companies because of its positive effect on net income. Similar to Street’s research,Cordazzo writes in his article, ‘Impactof IFRS on net income and equity for European countries’, that “IFRSmandatory adoption represents an effort to remove several differences betweenthe two accounting principles, IFRS and US GAAP, in order to make them closeras possible for producing comparable financial information.
” According to hisresearch, IFRS net income was 25.34 per cent higher than Italian net income,IFRS equity was 4.78 percent higher than Italian equity, and IFRS Return onEquity (ROE) was 9.47 percent higher than Italian ratio (Cordazzo 2013, p 57-61).Hence, IFRS significantly impact companies’ net income and equity positively. AnalysisIFRS is principally based DiscussionUnder IFRS, Last-in-First-out,LIFO, Inventory method is not allowed. In LIFO, assuming prices are increasing,ending inventory is valued at lower cost.
This increases the cost of goodssold, ultimately increasing gross profit. When gross profit increases, assumingno change in expenses, net income also increases.IFRS allows reportingrevenue sooner than US GAAP, hence a higher net income