Accounting Case Study
Table of Contents
International Accounting Challenges 3
Difference between GAAP and IFRS 4
Recording of Leasing Transaction 5
South British Company: 6
New York Solar: 6
Selection of Accounting Standard 7
International Accounting Challenges
Some of the key challenges are discussed below:
Legal Issues and Challenges:
Accountants of the company face the legal challenges while records international transactions due to differences in regulatory bodies and laws enacted from country to country. For example, Companies Ordinance of 1984 of Pakistan provides that the value of surplus on revaluation of fixed assets should be recorded in balance after figure of capital and reserve. On the other hand, as per IAS 16 such surplus needs to be credited to equity under a revaluation surplus head. Financial reporting is done in South Africa as per Companies Act 1973 but in case of Turkey, it is governed by Commercial Code of 1957 (Tauringana and Mangena, 2012).
Tax Related Issues:
Tax structure of a country differs from the tax norms compared to other country that is also an area of problem for accountants while making entry related to tax obligations. For example, if South British Company decides to purchase modern solar panels from a foreign business firm then it will need to consider tax norms of a particular country while making entry related payment of instalments for lease of same (UN, 2008).
Issues Related to Foreign Currency:
International transactions are generally done in two or more currencies. It is because South British will need to pay the provider of solar panels in currency of nation of solar panel provider. Accountants cannot make entry in more than one currency. These will need to assess exchange values of currency for entry of international transactions (Tauringana and Mangena, 2012).
Technical Issues:
International accounting transactions require high level of knowledge of international accounting standards like GAAP, IFRS, IASs etc. among accountants or preparers of financial statements of company. It is also necessary for international accountants to have knowledge of international laws like Sarbanes-Oxley Laws. Frequent amendments in international laws like IFRS and IASB also create challenges for the accountants (Carmichael and Graham, 2012).
Difference between GAAP and IFRS
Both GAAP (generally accepted accounting principles) and IFRS (international financial reporting standards) are internationally recognised accounting standards, but still there are some differences between them. GAAP is a rule based concept of accounting, while IFRS mainly focuses on principles of accounting. Due to distinct principle based framework in case of IFRS and GAAP, accountants have made different interpretations of the same accounting data (KPMG, 2014).
Another difference between GAAP and IFRS is the difference of methodology that is used by accountants for treatment of accounting data. For example, IFRS focuses on application of control model, whereas GAAP gives preference to risk and reward model (Gray, 2014). IFRS is mainly designed to be used by accountants and financial managers in profit oriented organisations. On the other hand, GAAP framework is designed for use in both profit and non-profit organisations (KPMG, 2014).
IFRS focuses on the preparation of four kinds of financial statements such as balance sheet, income statement, cash flow statements and the foot notes. On the other hand, GAAP identified the need to prepare balance sheet, income statement as well as other statements such as comprehensive income statement, statement of change in equity, cash flow statement etc for evaluation of financial performance of a company (Shamrock, 2012). Following are some areas that useful to highlight specific differences between GAAP and IFRS:
Inventory Management:
Under IFRS framework, entry related to inventory transactions is done as per FIFO method because LIFO method is not allowed in IFRS. In contrast to this, US GAAP standards allow use of both LIFO and FIFO methods for management and estimation of inventory in the business. This way, moving to a single method of inventory management, viz. FIFO method would provide better comparability of methods to accountants (Delaney and Whittington, 2010).
Written Down of Inventory:
In case of IFRS, inventory written down can be reversed in coming period in case of meeting specific conditions by the business. On the other hand, in case of GAAP, any kind of reversal of inventory written down is not permitted (Needles and Powers, 2012).
Entry of Intangibles:
Under GAAP framework, the entry of acquired intangibles is done on fair value of the assets. On the other hand, under IFRS the intangible assets will only be recognised by the business, if it would provide any economic benefits to company in future (Evans et al., 2014).
Development Costs:
The development costs are capitalised under IFRS (if certain criteria are met), while these cost
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Accounting Case Study Table of ContentsInternational Accounting Challenges 3Difference between GAAP and IFRS 4Recording of Leasing Transaction 5South British Company: 6New York Solar: 6Selection of Accounting Standard 7 International Accounting Challenges Some of the key challenges are discussed below:Legal Issues and Challenges:Accountants of the company face the legal challenges while records international transactions due to differences in regulatory bodies and laws enacted from country to country. For example, Companies Ordinance of 1984 of Pakistan provides that the value of surplus on revaluation of fixed assets should be recorded in balance after figure of capital and reserve. On the other hand, as per IAS 16 such surplus needs to be credited to equity under a revaluation surplus head. Financial reporting is done in South Africa as per Companies Act 1973 but in case of Turkey, it is governed by Commercial Code of 1957 (Tauringana and Mangena, 2012).Tax Related Issues:Tax structure of a country differs from the tax norms compared to other country that is also an area of problem for accountants while making entry related to tax obligations. For example, if South British Company decides to purchase modern solar panels from a foreign business firm then it will need to consider tax norms of a particular country while making entry related payment of instalments for lease of same (UN, 2008).القضايا المتعلقة بالعملة الأجنبية:وتتم المعاملات الدولية عموما بعملات اثنين أو أكثر. فيرجع إلى أن "الجنوب البريطاني" سوف تحتاج إلى دفع مقدم الألواح الشمسية في العملة للأمة موفر لوحة للطاقة الشمسية. لا يمكن إدخال المحاسبين بأكثر من عمله واحدة. هذه سوف تحتاج إلى تقدير قيم تبادل العملات لدخول معاملات الدولية (تورينجانا ومانجينا، 2012).المسائل التقنية:المعاملات المحاسبية الدولية تتطلب مستوى عال من المعرفة بمعايير المحاسبة الدولية مثل مبادئ المحاسبة والإبلاغ المالي، إلخ المحاسبة بين المحاسبين أو معدي البيانات المالية للشركة. من الضروري أيضا للمحاسبين الدوليين لديهم معرفة القوانين الدولية مثل "القوانين"-أوكسلي. كثرة التعديلات في القوانين الدولية مثل مجلس معايير المحاسبة الدولية والمعايير الدولية أيضا تخلق تحديات للمحاسبين (كارمايكل وغراهام، 2012).الفرق بين المحاسبة والإبلاغ المالي مبادئ المحاسبة المقبولة عموما (مبادئ المحاسبة المقبولة عموما) ومعايير الإبلاغ المالي الدولية (معايير التقارير المالية الدولية) معايير المحاسبة المعترف بها دوليا، ولكن لا تزال هناك بعض الخلافات بينهما. مبادئ المحاسبة المقبولة عموما حكم يستند إلى مفهوم المحاسبة، في حين أن المعايير الدولية يركز أساسا على مبادئ المحاسبة. بسبب مبدأ متميزة على أساس الإطار في حالة المعايير الدولية ومبادئ المحاسبة المقبولة عموما، جعلت المحاسبين تفسيرات مختلفة لنفس البيانات المحاسبية (KPMG، 2014).Another difference between GAAP and IFRS is the difference of methodology that is used by accountants for treatment of accounting data. For example, IFRS focuses on application of control model, whereas GAAP gives preference to risk and reward model (Gray, 2014). IFRS is mainly designed to be used by accountants and financial managers in profit oriented organisations. On the other hand, GAAP framework is designed for use in both profit and non-profit organisations (KPMG, 2014).IFRS focuses on the preparation of four kinds of financial statements such as balance sheet, income statement, cash flow statements and the foot notes. On the other hand, GAAP identified the need to prepare balance sheet, income statement as well as other statements such as comprehensive income statement, statement of change in equity, cash flow statement etc for evaluation of financial performance of a company (Shamrock, 2012). Following are some areas that useful to highlight specific differences between GAAP and IFRS:Inventory Management: Under IFRS framework, entry related to inventory transactions is done as per FIFO method because LIFO method is not allowed in IFRS. In contrast to this, US GAAP standards allow use of both LIFO and FIFO methods for management and estimation of inventory in the business. This way, moving to a single method of inventory management, viz. FIFO method would provide better comparability of methods to accountants (Delaney and Whittington, 2010).Written Down of Inventory: In case of IFRS, inventory written down can be reversed in coming period in case of meeting specific conditions by the business. On the other hand, in case of GAAP, any kind of reversal of inventory written down is not permitted (Needles and Powers, 2012).Entry of Intangibles: Under GAAP framework, the entry of acquired intangibles is done on fair value of the assets. On the other hand, under IFRS the intangible assets will only be recognised by the business, if it would provide any economic benefits to company in future (Evans et al., 2014).Development Costs:The development costs are capitalised under IFRS (if certain criteria are met), while these cost
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