GAAP IFRS and Financial Statements

Financial Statement from GAAP to IFRS

Financial statements are prepared either in GAAP or IFRS. The translation of the financial statements from GAAP to IFRS implies that items within the incomes statement as well as the balance sheet will be treated in a different way. The items within the income statement and the balance sheet are treated using different rules and approaches under the different accounting approaches. The item selected in this analysis that I will be specifically addressing is inventory. The convergence between GAAP and IFRS is a substantial undertaking and will influence business operations in the future. With respect to inventory, it appears that there are two aspects of consideration. One the one hand, there is the exclusive and sole use of First-In, First-Out (FIFO) approach. On the other hand, there is the allowing of both the First-In, First-Out and Last-In, First-Out (LIFO) approaches. In the contemporary, GAAP is a rule-based system whereas the IFRS is a principle-based system. The key challenge encompassing convergence is coming up with a universal approach (Robinson et al., 2015).

Current Treatment under GAAP and the Codification Governing Treatment of Inventory

The codification governing the treatment of inventories under GAAP is ASC-330, which provides guiding principles on the accounting and reporting if inventory within the financial statements. The measurement of the carrying value of inventory is considered to be the lower of cost or market value. In line with this, the similar formula employed to ascertain the cost of inventory does not require to be applied to all inventories that are of the same nature and use to the organization. With respect to accounting methods, the codification allows First-In, First Out (FIFO), Last-In, First Out (LIFO), weighted-average cost, together with specific identification are all approaches that are allowed for the determination of the cost of inventory. The key aim in choosing a method ought to be select the one which, under the circumstances, most evidently mirrors the income within the accounting period (IAS, 2017).

Current Treatment under IFRS and the Codification Governing Treatment of Inventory

The codification governing the treatment of inventories under IFRS is IAS 2, which provides guiding principles on the accounting and reporting if inventory within the financial statements. The measurement of the carrying value of inventory is considered either through the lower of cost or the net realizable value. In contrast to GAAP, the similar formula employed to make a determination of the cost of inventory has to be employed to all inventories that are of the same nature and use to the organization. With respect to accounting methods, IAS 2 necessitates the use of a distinctive costing method for identifying inventory for the financial statement items that are not normally interchangeable and for goods or services that are produced and separated for specific projects. In particular, IAS 2 explicitly necessitates the use of First-In, First-Out or the weighted-average cost method. The Last-In, First-Out method is unequivocally not allowed under IFRS (IAS, 2017).

Change Required to Convert the Statements from GAAP to IFRS

Calculating the final inventory, the amount is obtained by adding the beginning inventory with new purchases and subtracting the cost of goods sold. Under the LIFO approach, the method means that the product that was most recently received into the inventory is usually the first one of in the batch to be sold. On the other hand, under the FIFO method, it implies that the product that was first received into the inventory is usually the first one in the batch to be sold. Therefore, in changing the accounting approaches between GAAP and IFRS, it implies that while in GAAP the inventory that will be sold first will be the last one obtained, under IFRS, the inventory that was obtained in the beginning will be the one that will be sold first as well.

Clear and concise example of how the item is currently presented (under GAAP)

Under GAAP, both the LIFO and FIFO approaches are allowed whereas under IFRS, the LIFO approach is not allowed.

For instance, in the months of June, July, and August, an entity purchased a total of 200 widgets at $20 in June, $25 in July and $40 in August.

This implies that the beginning inventory is $4,000 whereas the closing inventory is $8,000

The following is an income statement prepared under GAAP using the LIFO approach:

LIFO Income Statement

Sales $30,000

Beginning Inventory $4,000

New Purchases $10,000

Ending Inventory $6,000

Cost of Goods Sold $8,000

Gross Profit $22,000

Expenses

Rent $2,000

Insurance $600

Utilities $400

Total Expenses $3,000

Net Profit $19,000

COGS (Beginning Inventory + New Purchases) – Ending Inventory = ($4,000 + $10,000) - $6,000 = $8,000

Gross Profit: Sales – COGS = $30,000 - $8,000 = $22,000

Net Profit: Gross Profit – Expenses = $22,000 - $3,000 = $19,000

Clear and concise example of the change that will be required to convert the statements from GAAP to IFRS

Taking into consideration that under IFRS, the LIFO approach is not permissible, it is imperative to change the income statement to make use of the FIFO approach, which is allowed.

FIFO Income Statement

Sales $30,000

Beginning Inventory $4,000

New Purchases $10,000

Ending Inventory $8,000

Cost of Goods Sold $6,000

Gross Profit $24,000

Expenses

Rent $2,000

Insurance $600

Utilities $400

Total Expenses $3,000

Net Profit $21,000

COGS (Beginning Inventory + New Purchases) – Ending Inventory = ($4,000 + $10,000) - $8,000 = $6,000.00

Gross Profit: Sales – COGS = $30,000 - $6,000 = $24,000

Net Profit: Gross Profit – Expenses = $24,000 - $3,000 = $21,000

Under the FIFO approach, the net profit obtain is higher compared to that under the LIFO approach.

Conclusion

In conclusion, IFRS and GAAP inventory treatment is dissimilar. Under GAAP, the FIFO, LIFO, and weighted-average methods are all permissible. On the other hand, with respect to the IFRS accounting approach, the LIFO method is not permitted. This implies that if an entity uses the LIFO method for inventory valuation is employed, it means that convergence with the IFRS means that the inventory valuation approach has to be done using the FIFO approach that is used. Under the FIFO approach, it is the first batch of inventory that is sold first. On the other hand, under the LIFO approach, it is the last batch of inventory that is sold first. One of the key differences is that under the FIFO method, the returns will be higher and greater. In particular, FIFO increases the gross profit of entity owing to the fact that it matches the sales with the inventory products that are lowly valuated. In the end, this increases the gross profit of the entity and at the same time increases the net income. On the other hand, under the LIFO approach, the entity is forced to keep hold of older inventory for a lengthier period of time. The downside of this is that there is a greater likelihood of these inventory items becoming spoilt or damaged and also losing value. The impact of this is that the method causes a decline in the gross profit of the company as it matches the sales with inventory items that are highly valuated. This implies that the gross profit and the net profit are lower.