Alternative Methods of Accounting

¶ … alternative accounting methods that have become increasingly popular. There are various merits and demerits of obtaining each of the accounting method for a firm however a company must choose the accounting method carefully as it proves to be a vital decision for the success of a company.

Accounting Methods are the guidelines and the basic rules based on which the businesses prepare and maintain their financial records. There have been a vast development in the accounting methods and practices over the years; however the two main accounting methods remain the same which are a) IRFS (International Financial Reporting Standards) b) U.S. GAAP (Generally Accepted Accounting Principle)

IRFS (International Financial Reporting Standards) were deigned to cater to the globalization of the businesses by providing an accounting method which is comparable and understandable beyond the regional boundaries. It was initiated to standardize the accounting methods for European nations by the European Council, the concept soon picked up pace and now is followed all around the world. U.S. GAAP (Generally Accepted Accounting Principles) is an accounting method accepted by the CPA Corporations and firms who adapt the guidelines and standards made by GAAP.

In recent times many companies have manipulated their earnings by adopting or switching to different accounting methods by remaining transparent to their shareholders. However this technique has also been abused by many as a tool for deceiving the investors and stakeholders. A change in the accounting method may cause a significant change in the tax payable, and the cash liabilities. It is important for a firm to follow the legal procedures in order to switch the accounting methods. The consent of the Commissioner is a must for any firm to obtain before switching the accounting method. There are certain rules and regulations set by the International Revenue Service which makes sure that any firm is not able to deceive its shareholders and investors by providing a framework for the change in the method.

Question # 2:

GAAP poses great amount of challenges to new entrants and small players. The small businesses with limited resources always face a really tough time in order to meet the GAAP standards which will make it hard for the startup technology business to comply with the GAAP standards. It is the responsibility of a form to provide the accurate and relevant accounting information to its shareholders so that they can have a look at the true picture of the performance of the business. These financial statements serve as a monetary measure for the shareholders to decide on the performance and the future investment decisions and the management decisions as well.

Business managers can minimize the impact of the financial performances through the compliance with the correct and suitable accounting methods. It is important to understand for a firm to realize the benefits of the accounting methods and how the various models can work in their favor.

Small business should decide on an accounting method according to the legal form of the firm, credit policies, sales, tax policies etc. A certain part of record keeping is required by the law and tax policies; however the main benefit of meeting a particular international standard is that the managers can make useful strategic decisions based on those financial statements. The accounting methods can be changed but it is an extremely complex process therefore a small business should decide on an accounting method in the beginning which is most suitable and profitable for the business.

Question # 3:

Assuming that a technology company decides to become a public listed company on NASDAQ, and they have to shift to the IRFS Standards, it will have a great impact on the balance sheet because of the difference between the two accounting standards. A few of the major differences in the balance sheet will include a change in the goodwill, fixed assets, and inventory.

Inventory will be recorded in IRFS on the basis of FIFO Method; if the technology company was using LIFO method then they will have to change the inventory recording method to FIFO because LIFO is not acceptable in IRFS. Fixed assets can be allowed to be subtracted with the accumulated depreciation in IRFS which is not allowed in GAAP. In the same way Goodwill is treated in IRFS which allows the firm to subtract accumulated depreciation.

The stock market will respond to the change in the accounting method and the decision to become public listed company on NASDAQ can go both the ways. Therefore it is important for the technology company to take strategic decisions accordingly. The financial ratios can be changed due to the shift in the accounting system. The stock market can react in a positive way if the technology company is able to comply with the new accounting standards and the financial performance is able to attract the investors to ensure them that their investment will be safe, the firm can attain long-term sustainability and there are growth opportunities in the technology company.

Question # 4:

There are a number of implications for the accountants if the private companies choose to shift their accounting system to U.S. GAAP and on the contrary the public listed companies are to be shifted to IRFS. In this case the accountants hired by the firms on their expertise of one kind of accounting system will have to face a major setback. Most of the accounting certificates are provided to the students on the basis of examination on the pattern of a single accounting system but if there is a need in the market for dual accounting system knowledge then the educational practices will also be required to change.