Week 5 Dicussion Forum Responses

RESPONSE ONLY! The 2 posts below are posts that need to be responded to. The response must be at least 100 words 

POST 1

IFRS versus GAAP 

Both accounting standards require a complete set of financial statements to include a balance sheet, a statement of stockholders’ equity, an income statement, and a statement of cash flows (Porter & Norton, 2018). While there are some similarities to both accounting standards, significant differences exist between the two. One such difference is the accounting of intangible assets. Intangible assets, such as goodwill, research and development, and advertising costs are only recognized if the asset will have a future economic benefit and has measured reliability under IFRS while all are recognized at fair value under GAAP.  Walmart has goodwill listed at 31,073 (in millions) on its balance sheet; under IFRS, Walmart would have to show a future economic benefit in order to be stated as an asset on its financials.  

Other differences include inventory methods and reversals. GAAP prohibits reversals once inventory has been written down while IFRS allows reversals in future periods if specific criteria are met. GAAP allows for the use of LIFO whereas IFRS does not. 

Pros and Cons 

IFRS- is more of a principle-based system and not based on specific rules like GAAP. While this type of structure has its benefits and can be stated as an advantage, it can actually be a disadvantage as well. “Organizations can choose to use only the methods that they wish to incorporate in their reporting, allowing their financial statements to show the results they desire. This structure makes it easier to incorporate profit or revenue manipulation into the findings, making it easier to hide financial problems that might exist” (ConnectUs, 2019). GAAP-is rule based and therefore reduces the risk of misrepresentation. IFRS would provide simplicity for Walmart with less rules; however, converting to IFRS would be an extensive undertaking. With IFRS, Walmart would have flexibility in listing contingent liabilities. A significant disadvantage would be the the company would no longer be able to use the LIFO inventory method.

Czech Republic 

As a member of the European Union, the Czech Republic uses the IFRS system and requires foreign entities to use unless the EU deems the foreign company’s standard to be equivalent (IFRS, n.d.). Companies are also required to keep accounting records in accordance with Czech GAAP for tax purposes or reconcile their IFRS financial statements to Czech GAAP (International Federation of Accountants, 2019). 

POST 2

A major difference between GAAP and IFRS is the method used for reporting. GAAP is said to be rules-based and IFRS is principles-based. Since less detail is provided in international standards, there are usually more disclosures in notes using IFRS than there are using GAAP. GAAP has more standards and has a higher level of detail in standards.

Walmart values inventories at the lower of cost or market as determined primarily by the retail method of accounting, using the last-in, first-out (“LIFO”) method. LIFO is allowed by the GAAP standards but not by IFRS. If Walmart needed to change to IFRS they would have to change the way they value inventory and since Walmart carries a large amount of inventory which could lose them some of the tax advantages, it currently takes advantage of. However, if it were to make the switch to IFRS reporting, its international business/locations would all be uniformed in reporting which might make it easier in the long run. Convergence would also create transparency and comparability between different countries.

The fact that IFRS is viewed as being of being transparent could benefit Walmart when entering Peru.  From an ethical and legal perspective, switching over might have a rocky start since a lot has to be disclosed and it may be viewed negatively. However, by switching and being transparent, the company could create better business relationships with the country when entering the market.

Again there are 2 posts. Each post needs a response and should be at least 100 words.