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Convergence of IFRS

Running head: CONVERGENCE OF IFRS 1
Convergence of IFRS
Student’s name
Institution
CONVERGENCE OF IFRS 2
Introduction
The International Financial Reporting Standards (IFRS) is a standard for financial
reporting that was issued by the International Accounting Standards Board (IASB). A firm must
be in compliance with the requirements of each applicable standard and interpretation under the
IFRS umbrella for it to be declared compliant with IFRSs (IAS Plus, 2017). IFRS consists of 13
major standards that provide the firms with the information they need to successfully comply
with the IASB requirements. The standards include first-time adoption, share-based payments,
business combinations, insurance contracts, non-current assets, mineral assets and their
exploration and valuation, disclosures of financial instruments, operating segments, financial
statements, joint agreements, interests in diverse entities, and measurements at fair value (IAS
Plus, 2017). It also includes a list of 41 International Accounting Standards (IAS) (IAS Plus,
2017). This essay analyzes the issue of convergence between IFRS and the U.S. Generally
Accepted Accounting Principles (GAAP) with a consideration of the case of Apple Inc.
Concerns for the Company
The adoption of IFRS will introduce changes in financial reporting that the management
of the organization needs to be aware of. One of the major concerns that the movement towards
IFRS presents is the implementation of the non-controlling interest rate with its valuation at fair
value, accompanied by either an exclusion or an inclusion of the goodwill. The second point of
concern is the inclusion of the exercisable shares with the adoption of IFRS which would force
the company to become a consolidated entity. The third point of concern is IFRS’s postulation
that the assets that the company is to obtain would not be contingent, thereby increasing the
quantities of the company’s assets and, possibly, inventory. Therefore, the company needs to
institute measures to adapt to these imminent changes.
CONVERGENCE OF IFRS 3
Differences in Income Statement and Balance Sheet
There are significant differences between the U.S. GAAP and IFRS in terms of the
income statements and the balance sheets. The list below presents the major differences between
the two standards.
I. The U.S. GAAP recommends the use of a specific format for the income statement, with
the options available being the single-step and the multi-step formats. IFRS, on the other
hand, does not provide a specific format for the income statement. However, IFRS
postulates that the items that must be included in the income statement are the revenue,
finance cost, post-tax results, tax expenses, post-tax gains or losses, and the profits or
losses for the financial period (IAS Plus, 2017).
II. IFRS requires no specific format for the balance sheet whereas GAAP requires the
inclusion of assets, liabilities, and equity in a descending order of liquidity (Epstein,
2018). However, IFRS requires the compliant firms to classify the current and non-
current assets and liabilities separately on the balance sheet. The GAAP balance sheet
format, however, seems to be globally acceptable (Epstein, 2018).
III. The IFRS prohibits the inclusion of extraordinary items in the income statement while the
GAAP allows its inclusion.
IV. IFRS requires the disclosure of expenses and incomes that are considered to be
exceptional by nature, size, and incidence. The GAAP, on the other hand, does not use
the term “exceptional items.”
V. Finally, under U.S. GAAP, when making contributions, the entity should place the
related tax under the net benefit cost. Under IFRS, on the other hand, the taxes are
included as part of the return-on-asset.
CONVERGENCE OF IFRS 4
Impacts of Convergence on Inventory Account
The IAS 2 standard requires inventories to be “stated at the lower of cost and net
realizable value (NRV) (IAS Plus, 2017). From a review of Apple Inc.’s financial statements, it
adopts the U.S. GAAP standard, and a convergence will see it having to report the costs of
purchase, costs of conversion, and other costs that it incurs to transport the inventories to their
current location. The costs then will have to exclude abnormal wastes, storage costs,
administrative overheads, foreign exchange differences involving the purchase of inventories
using foreign currency, and costs of interests (IAS Plus, 2017). Most of these items are currently
included in Apple Inc.’s financial statements and will have to be excluded under convergence
(IAS Plus, 2017).
Financial Instruments
Under IFRS, the financial instruments include cash, deposits for demand and time,
commercial paper, accounts receivable and payable, loans receivable and payable, notes
receivable and payable, debt and equity securities, asset-backed securities, and derivatives (IAS
Plus, 2017). Both the IFRS and GAAP require the classification of the financial instruments into
various categories, the recognition of derivatives on the balance sheet, and detailed disclosures in
the notes provided for the financial statements (EY, 2013). Some of the differences between the
two standards include IFRS’s splitting of hybrid instruments into debt and equity components,
IFR’s prohibition of the shortcut method for hedge effectiveness, and the prohibition of the
inclusion of the option’s time value under IFRS (EY, 2013). The GAAP has opposite provisions
on these three fronts.
Impacts of Conversion Process: IAS 32, IAS 39, and IFRS 7
CONVERGENCE OF IFRS 5
Apple Inc. currently uses GAAP standards. Therefore, one of the impacts of conversion
that it will have will be in complying with IFRS 7 as it will have to disclose the information
about the significance of financial instruments and the risks accompanying the instruments. For
instance, it will have to include the cash under the financial instruments. The second impact will
be in its presentation of the financial instruments, where it will have to classify them under
financial assets, financial liabilities, and equity instruments as contrasted to the current
presentation (IAS Plus, 2017).
Conclusion
Apple Inc. currently adopts the U.S. GAAP financial reporting standard. For instance, a
review of its financial statement reveals that it included intangible assets such as research and
development under the operating expenses. The convergence, therefore, is likely to introduce
tremendous changes to its financial reporting practices. Some of the concerns include its need to
become a consolidated entity, the changes in the management and reporting of inventory, the
differences in the reporting of financial instruments, and the income statement and balance sheet
changes that it will have to implement.
CONVERGENCE OF IFRS 6
References
Epstein, L. (2018). Key Financial Statement Differences between GAAP and the IFRS. Retrieved
from Dummies.com: http://www.dummies.com/business/accounting/key-financial-
statement-differences-between-gaap-and-the-ifrs/
EY. (2013). US GAAP versus IFRS. London, UK: Ernest & Young LLP.
IAS Plus. (2017). An Overview of International Financial Reporting Standards. Retrieved from
https://www.iasplus.com/en/standards/misc/standard57

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