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will research and compare international and U.S. accounting standards. This will enable you to see how the different reporting methods affect business and how product costs are affected by international business.
In the assignment you will do the following:
1. Compare and contrast basic U.S. and international financial accounting standards.
2. Explain how key international factors affect business reporting.
3. Identify key compliance and regulatory requirements.
| Extraordinary Items | Previously allowed the reporting of "extraordinary items" (unusual and infrequent events) on the income statement, though this practice has largely been eliminated. | Prohibits the classification of "extraordinary items." All items must be included in the income statement or notes. |
| Balance Sheet Ordering | Typically presents assets in order of liquidity (current assets first). | Usually presents assets in order of non-liquidity (non-current/long-term assets first). |
International business introduces complexity that fundamentally changes how product costs are calculated and reported.
The Factor: A company operating globally must translate the financial results of its foreign subsidiaries (which use different currencies) into the reporting currency of the parent company (e.g., U.S. dollars).
Effect on Reporting: This involves using different exchange rates (current, historical, or average rates) for various accounts (e.g., inventory, sales, fixed assets), which introduces foreign currency translation adjustments into the financial statements. These adjustments can create volatility in reported profits and equity.
Effect on Product Costs: Product costs (like raw materials purchased in a foreign currency) must be translated, meaning the reported cost of goods sold (COGS) can fluctuate significantly purely due to currency swings, even if the underlying physical cost hasn't changed.
The Factor: Accounting standards are influenced by the legal and economic history of a nation. For instance, IFRS relies heavily on professional judgment (a more principles-based approach), while U.S. GAAP demands strict adherence to specific rules.
Effect on Reporting: A German company reporting under IFRS might be required to capitalize certain costs that a U.S. company using GAAP must expense, leading to differences in reported profitability and asset values.
Effect on Product Costs: Where R&D is highly involved, the choice between expensing (GAAP) or capitalizing (IFRS) development costs directly impacts the cost recorded in the current period versus the future period, thus affecting the timing of product cost recognition.
The Factor: Companies sometimes strategically choose a market for listing based on the less burdensome or more favorable regulatory environment.
Effect on Reporting: This can lead to a convergence of standards (like the past move between the U.S. SEC and the IASB), but it also keeps constant pressure on regulators to balance investor protection with the desire to attract international capital.
Compliance in international business is governed by both local regulatory bodies and international securities regulators.
Requirement: Any non-U.S. company that wishes to list its stock on a U.S. exchange (like the NYSE or NASDAQ) must register with the SEC.
Compliance: Foreign Private Issuers (FPIs) are generally permitted to file their financial statements using IFRS without reconciliation to U.S. GAAP, provided the IFRS standards are as issued by the International Accounting Standards Board (IASB). Before 2007, FPIs using IFRS had to provide a complex reconciliation. This change significantly reduced the compliance burden for FPIs.
The two dominant accounting frameworks in the world are U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS).
| Feature | U.S. GAAP (Used in the U.S.) | IFRS (Used in over 140 countries) |
|---|---|---|
| Foundation | Rules-Based 🏛️: Contains detailed rules and specific industry guidance for almost every transaction. This often results in complex, longer standards. | Principles-Based 💡: Provides broad principles and general guidance, requiring significant professional judgment in application. |
| Inventory (LIFO) | Permits the use of the Last-In, First-Out (LIFO) method, which can lower taxable income during periods of rising costs. | Prohibits the use of LIFO. Requires FIFO (First-In, First-Out) or weighted-average methods. |
| Fixed Assets | Requires the cost model (carrying assets at historical cost less depreciation/impairment). | Permits both the cost model and the revaluation model (carrying assets at fair value). |
| Development Costs | Generally requires that most research and development (R&D) costs be expensed immediately as incurred. | Permits the capitalization of development costs (not research costs) as intangible assets once certain technical and commercial feasibility criteria are met. |