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The IFRS is an international financial reporting body that is regulated by the International Accounting Standards (IAS). The body has multiple financial standards which are effectively referenced using IAS numbers. A firm may be described as not complying with the IFRS if it fails to comply with any of the requirement of a specific standard and the interpretations thereof. Adherence of firms to the IFRS is supervised by International Financial Reporting Standard Committee (IFRSC) which is also involved in development and implementation of new standards. The IFRS is designed for use by profit making organizations. The basic requirement of the IFRS is the subscribing firms to provide authentic financial requirements (Ramin & Reiman, 2013).
Major concerns for Affiliated Computer Services Inc.
Moving from US GAAP to IFRS attracts a set of challenges for Affiliated Computer Services not experienced its current financial reporting system. It would be necessary for the company to know that it may incur various costs upon switching from US GAAP to the IFRS. It may not be a smooth ride for Affiliated Computer Services in converting to the IFRS due significant differences between the US GAAP and the IFRS. While the US GAAP is principle based and contains much detail, the IFRS has got broad financial reporting rules with limited application guidance hence leaving a big room for interpretation (Shamrock, 2012).
According to Shamrock (2012), the company’s economic performance may suffer significantly based on specific changes in five key areas of financial reporting system. These include reporting of fair values, recognition of revenue, reporting consolidation, reporting of share-based payments as well as financial liabilities. For example, in regard to accounting for equity and financial liabilities with the IFRS, a financial asset is required to be categorized as a liability if the owner has a commitment to surface it in cash or asset. In US GAAP, such financial liabilities are classified as equity rather than debt.
Differences in Income Statement and Balance Sheet after the Convergence
After the convergence the format of the balance sheet is deemed to change since IFRS and US GAAP subscribes to different formats of presenting the financial statements. Unlike the US GAAP, the IFRS requires presentation of current and non-current liabilities and assets as detached classifications. It is compulsory for firms to present their assets and liabilities in liquidity order for the GAAP unlike in IFRS. In the US GAAP, the total assets should balance with the amount of total liabilities and the equity of shareholders. Such a requirement is not present in the IFRS hence this may be an observable change (FASB, 2015).
With regard to the income statement, the IFRS does not stipulate a specific format as per the case with US GAAP which does allow the single-step or the multistep presentation design. The income statement of Affiliated Computer Services may hence use the single-step or the multistep design in presenting items. Extraordinary items are not allowed in the income statement by IFRS while the same are allowed for in the US GAAP. These are items which are described as unusual and intermittent such as goodwill. After convergence extraordinary items will no longer be included in the income statement of the converting company (Ramin & Reiman, 2013).
Impact of Convergence on Company’s Inventory Account (IAS 2)
In IFRS, the inventories are estimated at the lower of cost and overall realizable value while in the US GAAP they are estimated at the lower of cost and the value of the market. This implies that the inventory account of Affiliated Computer Services will be deflated since the market value of inventory is usually lower than the net value. There will no significant impact in respect to classification of inventory costs since both accounting standards have similar classification of inventory costs. However, decommissioning and reinstatement of production costs of that inventory are included in the overall costs in IFRS unlike in US GAAP where decommissioning of such costs are added to respective items of property or equipments. This implies that the company’s inventory restoration cost will be inflated due to inclusion of the same in inventory costs (Shamrock, 2012).
The Affiliated Computer Services Company has to bear with adopting the use of first in, first out (FIFO) or the weighted average inventory costing method since the use of last in, first out method is forbidden by the IFRS. This means that the company’s inventory at the transition date will not be accounted for at the period due to shift from LIFO to FIFO inventory accounting method implying unrealized costs. The approach for writing down inventory is different with both accounting standards. In US GAAP, the inventory is offset to the market value at the event where market value falls below the cost, unlike in IFRS where such is written off when the disposable realizable value fall below the cost (Shamrock, 2012).
Differences for Accounting for Financial Instruments
Ramin & Reiman (2013) indicates that accounting for equity and liabilities has significant differences in the manner of conceptualization between IFRS and US GAAP. Based on the presumptions of IFRS, a financial instrument is categorized as a financial liability if it will be surfaced in an alternate amount of the firm’s equity instruments. Unlike IFRS, the US GAAP classifies a financial instrument as liability only if it’s primarily fixed to a predetermined monetary amount which is known at the beginning that it will or might be surfaced in an alternate amount of the firm’s equity instruments. This implies a different stance in reporting for equity and liabilities for Affiliated Computer Services Company.
There exists a difference in classification of financial assets and liabilities between the IFRS and US GAAP. Under the IFRS, the financial assets and liabilities are classified either at fair value in respect to profit or loss to establish whether fair value has been recognized. Other classifications include loans and receivables, items available for sale and held-to-maturity. The US GAAP however contains these categories plus a category for debt and marketable equity securities as well as held-for-trading. Unlike with IFRS, the US GAAP does not contain equity securities that are not quoted in the market (Ramin & Reiman, 2013).
Affiliated Computer Services for example will experience challenges in converting to IFRS based on the presumptions of IAS 32 in presentation and disclosure of information pertaining financial instruments. Where no objective evidence is required in US GAAP for impairment of financial instruments, the company will be required to provide such after converting to IFRS. The company will also experience a new challenge in qualitative disclosures required by the IFRS 7 where the company will be expected to explain the objectives of the management, as well as their policies and strategies in managing financial risks. This will definitely be a new challenge since the US GAAP does not call for quantitative disclosure of financial instruments (FASB, 2015).
FASB. (2015). Accounting Standards Codification. Generally Accepted Accounting Principles. Retrieved on June 13, 2015 from < http://www.iasplus.com/en-us/standards/fasb/default.html#fasb-accounting-standards-codification>
Ramin, K. & Reiman, C. (2013). IFRS and XBRL how to improve business reporting through technology and object tracking. Chichester England: Wiley.
Shamrock, S. (2012). IFRS and US GAAP a comprehensive comparison. Hoboken, New Jersey: Wiley.