Question

IFRS	U.S. GAAP
4. May use either cost model or revaluation model to a PPE class.	4. Require cost model and prohibit revaluation model for PPE.
5. Each part of an item of PPE with a cost that is significant in relation to the total cost shall be depreciated separately	5. Take a ‘holistic view’ of PPE depreciation instead of the IFRS ‘component’ approach.

Using the chart above: Discuss which accounting treatment (IFRS, U.S. GAAP, or another new treatment from your own insight) is best for decision usefulness in terms of assessing an entity’s cash flow prospects. You may want to think critically about pro(s) and con(s) of each accounting treatment per IFRS vs. per U.S. GAAP.

Be sure to provide specific justifications to support your answers.   These justifications should be based upon the following.

1. Potential effects of an accounting treatment on economic resources, claims to these resources and changes in these resources and claims. Do such effects better enable capital providers to assess amount, timing and uncertainty of future cash flows?

2. Discuss which specific characteristics of useful financial information in Conceptual Framework.doc your favored accounting treatment supports. (Feel free to read Conceptual Framework for IFRS.pdf) There are three groups of these characteristics.

- Fundamental characteristics: Relevance and Faithful representation, each of which has three supporting elements.

- Enhancing characteristics: Comparability, Verifiability, Timeliness and Understandability.

- Cost constraint, i.e., costs < benefits.

Part II: FOR DIFFERENCE #4

Under IFRS, if fair value of land is appreciating and fair value of office equipment is depreciating, which measurement model (cost or revaluation) would you suggest for measuring land vs. office equipment? Use the Conceptual Framework to justify your answer. Your answer here should be consistent with your answer to difference #4.

Please keep in mind that the following justifications are NOT acceptable for either Parts I or II.

1. The treatment leads to better financial performance, e.g., higher earnings or assets. Such justification is for companies like Enron, WorldCom or Parmalat.

2. Better matching of revenue and expenses: Matching principle is GONE from the conceptual framework because revenue and expenses are defined in terms of a decrease or increase in assets and liabilities.

3. More conservative treatment: Conservatism is NOT part of the conceptual framework because it contradicts with "Faithful Representation".

Answer 1

                                                                          IFRS Accounting

• IFRS, or International Financial Reporting Standards, is nothing but a single set of accounting standards which is been used in multiple countries.
• Different investors, auditors and regulators from different countries work along with IASB in order to determine the needs of each type of user and incorporate those needs in the standards.
• The merits gained by implementing these standards include consistent financial statement formats, understandability and global comparability.

These IFRS accounting standards is developed by the IASB, or International Accounting Standards Board. They intend to create a consistent approach of the financial reports prepared worldwide.

Merits and demerits of IFRS compared to GAAP

Advantages of IFRS compared to GAAP reporting standards

1.1 Focus on investors

The first advantage of IFRS when compared to GAAP is about the focus it lays on the investors

• IFRS gives more accurate, precise appropriate and comprehensive financial statement information which is more pertinent to the national standards. The information provided by financial statements prepared under IFRS are usually more understandable by the investors. The IFRS prepares financial statements without the interference of sources.
• IFRS is highly transparent hence it increases the efficiency of contracting between companies and their management, enhancing the corporate governance.
• The conjunction to IFRS has improved the comparability of financial statements in the EU. This has been achieved through having the same reporting standard under a single market, the EU.
• IFRS helps the new or small investors as it makes the reporting standards simpler and is in better quality. It helps to puts small and new investors in the same position with other professional investors. T helps in the minimization of the risk of non-understanding the financial statements by the small investors.

• IFRS has helped in improved consistency and transparency of financial reporting. This factor is the most important one as it provides the crucial advantage for conversion from GAAP to IFRS. It is not only consistent on macroeconomic aspects, but also on financial reporting which improves relationship between investors and companies among member countries.
• IFRS helps in better access to foreign capital markets and investments. Many countries in Europe have started to Join for the adoption of IFRS as it improves the companies to have access for the financial statements. Improvement in the comparability of international financial markets, thereby increasing the focus on investors is a major factor for the maximum adoption of IFRS.
• The comparability of financial statements get worse if one [articular country uses two different sets of reporting standards. It is hoped that the usefulness and improved comparability of IFRS may be achieved in the medium-long term

                                                                    Relevance

•          The way treatment of gains and losses in a timely manner puts IFRS in a more reliable and credible position than the GAAP.
• The balance sheets prepared under IFRS are likely to be more useful due to its layout and the consistency, and the level of complexity compared to GAAP which actually is more complex.
• The new IFRS reflects on economic substance more than legal form. A true and fair view of the companies’ transactions could be found from this.
• The way treatment of gains and losses in a timely manner puts IFRS in a more reliable and credible position than the GAAP.
• The balance sheets prepared under IFRS are likely to be more useful due to its layout and the consistency, and the level of complexity compared to GAAP which actually is more complex.

• Moreover, other benefits as mentioned during the interview are cost saving with new IFRS especially for multinational corporations. However, before companies can start enjoying the cost savings, they have to spend considerable amount of money as a transitional costs.

• Hence it could be concluded that IFRS is more consistent and reliable than GAAT