International Financial Reporting Standards Essay
Dr. David Morris
March 20, 2016
International Financial Reporting Standards
Say you want to buy stocks in a cell phone manufacturing company. How do you know which company to invest in? A good business plan would be to compare the financial statements for each competing company. A task as such would be nearly impossible if there were not a standard system of financial records.
In 1973, with the growing amount of international trade, the International Accounting Standards Committee decided to create a set of new accounting standards for the European nations. The International Financial Reporting Standards (IFRS) were created in an attempt to communicate easily tradable financial records for the countries of Europe …show more content…
Approximately 90 countries have fully confirmed use of the IRFS but 120 countries require IRFS reports. The IASB has set forth four accounting goals to help with accounting communication. The first rule is to develop global accounting standards requiring transparency, comparability, and high quality in financial statements. The second rule is to encourage global accounting standards. The third goal the IASB has stated is when implementing global accounting standards, to take into account the needs of emerging markets. Lastly, the final goal of the IASB is to converge various national accounting standards with the global accounting standards. Stating and following these goals make the IASB an effective benefit to the business …show more content…
There are a few major setbacks though. Public United States companies want to continue the use of the Last In First Out (LIFO) method. The IFRS have banned LIFO because it can lead to distortions about a companies’ profitability based on inventory and also can create a false inflation in earnings. The benefit of using LIFO is that, for United States companies, the financial records will report a higher cost of goods sold in turn lowering the companies tax liabilities. IFRS requires capitalization of development cost. This means that any cost a company accrues when building or financing fixed assets such as building factories need to be closed out by the end of the financial period. Capitalized costs are not expensed in the period they were incurred, but recognized over longer lengths of time through depreciation or amortization. The US GAAP on the other hand does not have a requirement to capitalize on cost meaning that if the company prefers, they have the opportunity to expense a cost