US GAAP and IFRS Comparison - Essay Example

MEMO: U.S. GAAP & IFRS COMPARISON [College FIU, Inc. 11200 S.W. 8th Street Miami, FL 33199. Memorandum Date: 20th November 2012 Subject: Accounting treatments under U.S. GAAP and IFRS To: FIU, Inc. From: FAU Inc. INTERNAL CONTROL WEAKNESSES Mahanagar Telephone Nigam Ltd. Fundamental Company is a communication firm which operates in the Indian economy. The company provides services in modern telecommunication sector which includes provision of internet services. The company has advanced from 2G to 3G communication strategies as a way of enhancing its competitiveness in the tele-communication industry of India. According to the 2011 audit report (conducted by Price Waterhouse as the external audit body), a number of weaknesses were reported in the auditing process. These deficiencies in the auditing and financial reporting of the Mahanagar Telephone Nigam Ltd. Fundamental Company included; Ineffective interaction between the internal audit committee and the management, which limited the independency of the company’s internal audit committee; lack of formal manuals and auditing guidelines in accordance with the GAAP with respect to operational, budgeting and financial standard which resulted into over reporting of the financial records of the company; and inadequate financial reporting and accounting systems and processes which would enhance accuracy of the reports and increase the pace of auditing. NetLogic Microsystems, Inc. is a fabless semi-conductor corporation which develops, designs, and sells integrated processors and circuits mainly used in wireless and mobile infrastructure networks. In their financial and auditing report for the accounting period dated Feb. 15, 2012, the company reported a series of limitations in the auditing exercise. As highlighted by the audit committee, auditing process indicated flaws covering from management to financial projections. The internal audit control policy of NetLogic Microsystems is highly influenced by the senior management boards, thus limiting the independence and autonomy of the internal audit body. On the other hand, the audit committee identified the following material weaknesses in the internal control of NetLogic Microsystems, Inc: first, consolidated financial statement analysis and preparation weaknesses. In the fiscal period 2011, NetLogic Microsystems, Inc did revise its net cost allocation methodology to comply with the GAAP. However, internal auditing report revealed that the proposed methodology of allocation failed to report major program costs. This prompted the officials to reconsider and revise net cost statement to present cost valuations. Besides, it was noted that Managements Discussion and Analysis (MD&A) contained irrelevant information and therefore were incorrectly accounted for in the transfers. Secondly, the accounting and financial statements of the NetLogic Microsystems, Inc reported abnormal real balances which is against the USSGL. Finally, internal control revealed lack of oversight in transfer allocations (Shamrock, 2012). There are numerous similarities as well as differences between U.S. GAAP and IFRS. This report summarizes the standards that govern the treatment of financial statement presentation, and balance sheet and income statement effects under the two frameworks, as well as their major differences. We hope that this summary will help you decide the framework that best suits your company. IFRS and GAAP International Financial Reporting Standards (IFRS) is international reporting policies advanced by International Accounting Standards Board (IASB) and is globally accepted in accounting and financial reporting. However, in the United States, Generally Accepted Accounting Principles (GAAP) is preferred over the IFRS. As at 2008, the U.S. allowed foreign companies to reporting the financial and accounting records using IFRS without necessarily reconciling their reports with the GAAP. The major differences between the IFRS and the GAAP are identified to cover tax policy, business mergers, revenue accounting and contingent liabilities. Adopting the IFRS in the United States is inevitable as it will results into higher income reported by firms as well as streamlining the cost for global firms which further lowers the costs of capital. However, the transitional cost of replacing GAAP with IFRS will be relatively higher both in time and resource and this will approximately last for 2-3 years. The standards that govern the U.S. GAAP and IFRS treatment of financial statement presentation In both U.S. GAAP and IFRS, the complete set of financial statements include income statement, balance sheet, cash flows, and other comprehensive income as well as notes to the financial statement. Also, the two frameworks use accrual method of accounting in preparation of the financial statement, with the exclusion of the cash flow statement. There are, however, exceptional situations whereby this rule is not followed. Consistency and materiality are the other standards that are common in both frameworks, which are used by entities in preparation of financial statements (Shamrock, 2012). The balance sheet and income statement effects under the US GAAP and IFRS approaches Under U.S. GAAP, presentation of income statement and balance sheet follows any specific or general structure. However, this provision does not include public companies, which are required to structure their income statement and balance sheet in accordance with S-X requirements. On the other hand, IFRS does not lay down any standards. However, IAS 1 which is concerned with presentation of financial statements take into account a list of minimum items, which are less assertive than regulation S-X (Shamrock, 2012). The major differences between the two approaches There are a number of differences between U.S. GAAP and IFRS frameworks. First, regarding consolidation, U.S GAAP favors a risks-and –rewards model, but IFRS prefers a control model. Second, under U.S. GAAP, unusual items are featured under the net income whereas in IFRS they are not set aside in the income statement. Third, under U.S. GAAP, entities are entitled to select between FIFO and LIFO when recording their inventories; whereas under IFRS, LIFO is not applicable (Shamrock, 2012). Finally, under U.S. GAAP, the EPS is computed by taking the average of the individual interim period incremental shares; whereas under IFRS, the EPS computation does not take into account the average of individual interim periods. U.S. GAAP vs. IFRS Inventory Standards In accounting for inventories, the U.S. GAAP advances more than one principle and standards. These include; the Accounting Research No.14, Inventory Cost Amendment of ARB article (3), FASB Statement and Interpretation No.1. On the contrary, the inventory standards as outlined in the IFRS only advance a single method of accounting for the inventories. This is specified in the International Accounting (2) for inventories and stocks. Reference Shamrock, S.E. ( 2012). IFRS and US GAAP: A Comprehensive Comparison. New York: John Wiley & Sons. Read More