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Research and compare international and U.S. accounting standards. This will enable you to see how the different reporting methods affect business and how product costs are affected by international business.
1. Compare and contrast basic U.S. and international financial accounting standards.
2. Explain how key international factors affect business reporting.
3. Identify key compliance and regulatory requirements.
The two main sets of accounting standards are U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS).1 Understanding the differences between these two systems is crucial for analyzing multinational businesses and the associated impact on reported performance and product costs.2
| Feature | U.S. Generally Accepted Accounting Principles (GAAP) | International Financial Reporting Standards (IFRS) |
|---|---|---|
| Origin/Authority | Financial Accounting Standards Board (FASB). Required for U.S. public companies by the SEC. | International Accounting Standards Board (IASB). Adopted by over 140 countries, including the EU, Canada, and Australia. |
| Philosophical Approach | Rules-Based: Provides detailed, specific rules and industry-specific guidance for almost every situation. | Principles-Based: Provides broad principles and conceptual guidelines, requiring significant professional judgment in application. |
| Inventory Valuation | Allows LIFO (Last-In, First-Out), FIFO, and weighted-average. LIFO is popular in the U.S. because it can lower taxable income during periods of rising costs. | Prohibits LIFO (Last-In, First-Out). Only allows FIFO and weighted-average. |
| Fixed Assets/Revaluation | Assets are recorded at historical cost and are generally only written down, not up (impairment test). |
International factors introduce complexities that require flexible accounting and disclosure.3 These factors significantly impact how multinational enterprises report their financial health and product costs.4
Foreign Currency Translation: When a U.S. company prepares consolidated financial statements, it must translate the financial results of its foreign subsidiaries (which operate in different currencies) back into U.S. dollars. Fluctuations in exchange rates directly affect reported revenue, expenses, and asset values.5
Impact on Product Costs: A weak U.S. dollar makes inputs purchased internationally more expensive, increasing the reported Cost of Goods Sold (COGS) and potentially requiring adjustments to inventory valuation, which directly impacts product costing.
Hyperinflationary Economies: Operations in countries experiencing hyperinflation (e.g., inflation 6$>26\%$ over three years) require special accounting rules under both GAAP and IFRS.7 Assets and liabilities must be adjusted to reflect the change in the purchasing power of the local currency, which significantly distorts standard historical cost reporting.
Taxation and Transfer Pricing: International tax laws are complex. Companies use transfer pricing (the price at which divisions of a multi-national company transact with each other) to legally shift profit to lower-tax jurisdictions.8 Accountants must report these internal transactions accurately under accounting standards while complying with various national tax regulations, adding complexity to expense allocation and reported profits.
Legal and Regulatory Environment: Different countries have varying legal requirements regarding corporate governance, employee benefits (e.g., pension funding), and environmental liabilities. These obligations affect the recognition of liabilities and contingent losses on the financial statements.