Question

Merchandising companies invest large sums of money in inventory, having to account for the purchasing, selling, and costs. Most U.S. based companies or companies on U.S. exchanges have previously had to follow the GAAP standards. As IFRS has moved forward in many countries, these companies have to review if the GAAP or the IFRS standards should be used.

Your company has been following GAAP standards and is looking to expand to international markets. You have been using a LIFO cost of inventory system and have had several inventory items marked down under the lower-of-cost-or-market. You have been asked to present the pros and cons of converting to the IFRS standards, thus allowing your company to move to international markets. Explain how this change will affect the financial statements.

Answer 1

Following are the Pros of converting to the IFRS standards:

1. Adopting IFRS will be globally acceptable. Hence there is no need to prepare separate books of account for cross-border financial reporting. This will result in saving of time and money.
2. Adopting IFRS will attract attention of global investors and make them convenient. It will make cross-border investments easier.
3. End users also enjoy the advantage of understanding the financial data communicated whether it comes from one country or a different one. IFRS accounting guidelines require that all companies follow the same guidelines.
4. End users reap the benefits of comparing the financial statements from a company in one country to a company in another country.

Following are the cons of converting to the IFRS standards:

1. Adoptions of IFRS is not compulsory yet and other countries continue to hold out as well. Hence in case of adoption of IFRS, two sets of books to be prepared. One set on GAAP and other Set on IFRS.
2. IFRS allows flexibility on various cases. Companies can utilize only the methods they wish to, allowing the financial statements to show only desired results. This can lead to revenue or profit manipulation.

If our company Adopts IFRS, then the policies of IAS 2 to be applied while preparing recording the inventories and making the inventory valuation. Accordingly the financial statements will state differently. the following are the key differences between GAAP and IFRS which will have impact our case.

	Treatment Under GAAP		Treatment Under IFRS
1	Allows all three methods of Inventory Accounting- 1.weighted-average cost method, 2. first in, first out (FIFO) and 3. last in, first out (LIFO)		Allows only two methods of Inventory Accounting- 1.weighted-average cost method and 2. first in, first out (FIFO)
2	Valuation will be - lesser of cost or market value		Valuation will be lesser of cost or net realizable value.

and the changes will effect the financial statements as below.

1. FIFO or Average cost method of Accounting to be adopted instead of current practice of LIFO method.

2. Inventory to be revalued to lower of cost of net realizable value instead of current practice of cost or market value.