There are a lot of countries that have been applying locally developed and established Generally Acceptable Accounting Principals (GAAP) for a very long time in all the aspects and applications of accounting in their companies, departments and nationwide financial accounts. These accounting concepts entail the establishment of methods and ways of carrying out accounting tasks within an organization in the standards and ways that have been formulated and put into effect by the local authorities and which usually give an identity in accounts within a country. With these standards being applied to the local organizations, the organizations are able to function with effects only from the local economic environment and not necessarily from the overall global economic environment. This way, the organizations are able to keep at par with the local competition among the rest of the organizations and also to keep being updated and saturated with all the necessary information about the economy and any factors that may affect the operations and returns of the organization. Such an organization is hence within the blanket of the economy in which it is operating, making it experience a great influence from the economic environment within its local settings (Kaiser 2010).
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The International Financial Reporting Standards (IFRS) is a mode of accounting applied to an organization for the sake of carrying out the accounting process while applying internationally accepted methods that will allow it to be compared and contrasted in its operations with other organizations under an international platform. This way, the organization is no longer fully affected by the local economic environment but rather is mainly dependent on the global economic environment. This way, the organization is able to carry out its operations from one country while still focusing its operations to the international standards. This way, all the subscribed organizations are placed under an internationally accepted and standardized accounting methodology that allows them not to function as local organizations but rather as international ones as they are more reliant on the economic conditions of the global economy rather than by the local economic conditions (Prince 2010).
Many countries that have been using the local GAAP system in accounting are shifting to the international standards as dictated by the IFRS so as to be more stable as the global economy is more stable compared to local economies which are usually affect ted by different factor changes such as changes in inflation rates, interest rates and even the demand and supply changes in the market. This article seeks to identify the various impacts of the shift from the local system to the international one.
The Impacts of Changing from local GAAP to the IFRS
There are many differences associates to the two systems of accounting as dictated by their applications and concepts and also by the laws existing in a country. While most of the countries have different laws that govern the accounts of an organization, especially in its application to different areas such as taxation, the IFRS utilizes a common law that disregards the local laws within a given country. This brings about a lot of changes and differences that are experienced within organizations as a result of the shift from the local to the international system.
First, the local application utilizes a last in first out (LIFO) method in its taxation application of the organizational accounts. This method is usually applied in the determination of the value of the inventory in an organization so as to determine its taxable income and its taxation position. The LIFO method is very convenient for most of the organizations and results to a low tax expense for the organizations. However, the IFRS applies a FIFO rule in the valuation of the organizational inventory. This method has a great friction with the LIFO method, a fact that results to excessive and increased taxable income resulting to most of the organizations having to pay more taxes and hence increasing their tax expenses. This factor results to lowered returns for the organization and consequently slows the growth of the organization while still discouraging the other organizations from operating within such an environment (Kaiser 2010).
On the other hand, changing from GAAP to IFRS may result to a great disparity in the methods used for valuation of the organizational assets in the long-term. In the GAAP method, different techniques are utilized in the valuations as implied by the local laws. Usually, these methods focus on the book value of the given assets at a long-term basis. However, the IFRS utilizes different techniques that focus on the fair value of an asset in its valuation over a long period of time. This difference in techniques used for valuation of assets may result to a lot of imbalances in the different accounting ratios applied in the determination of the value of assets in an organization resulting to consideration of wrong information while dealing with an organization, a factor that may have very adverse financial implications on the organization as it may result to higher taxation as well as more expenditures for the organization. The organization may also be misplaced in the competitive environment it exists in as one may over-value or under-value it and focus on the wrong information for its operations. The organization may also experience wrong and misleading decisions made by its management in efforts to maintain it in a competitive level hence resulting to great losses and lack of direction for the organization and barring it from achieving its organizational goals and objectives ((Prince 2010)).
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With the changes from the local GAAP system of accounting to the international standards as inscribed in the IFRS, there are a lot of changes that are expected to be experienced in the definition and standards for uncertainties expected in the taxation process. In organizations, there are many factors that result to the presence of uncertainties in the process of taxation of an organization due to the many factors that result to disparities in the determination of the taxable income of the organization as well as the tax position of the organization. Most of the local GAAP systems do not have good and reliable methods of determining the uncertainties in taxation as a result of the different methods used for determination of the taxable income and the different factors considered in the valuation and determination of taxable income. Also, since the tax expenditure by an organization is determined by the amount of tax paid by an organization as a result of the different methods utilized in determining the taxable income of the organization, there is usually no stability in taxation system since most of the techniques used for asset valuation and determination of the taxable income are unreliable and not consistent. Hence, the GAAP systems usually experience high uncertainties in the taxation process and are well known to impose a higher or lower tax on an organization resulting to instability in the organizational financial accounts. However, the IFRS is adopting ways of assimilating different universally acceptable, reliable and consistent techniques that will be used for valuation of the assets within an organization and the consequent determination of the taxable income of an organization. Hence, the IFRS considers any liabilities in the uncertainties experienced in the taxable income only when they are verified and have been properly developed. This way, the organizations do not experience raised and unfair tax levels and hence are able to reduce on their tax implications on their financial accounts. This way, due to the stability in the taxation process, organizations are able to be more stable and hence their growth is encouraged even as they experience low and fair financial implications of taxes on their financial accounts (West et al 2004).
There is a great difference that will be experienced in the definition and remunerations involving the implication of cash taxes to an organization with the shift from the local accounting system of the GAAP to the international system of IFRS. These two systems apply financial accounts in a different way. The GAAP method usually induces the determination of taxable income and value of assets from the financial account of an organization. This way, the organization is able to determine its cash tax implications from the value of its assets and the determined taxable income. However, since the IFRS system utilizes different methods for its applications in determination of the value of assets in an organization and the taxable income within that organization, there is a great disparity in the value of cash tax that is imposed on an organization by the IFRS compared to the one imposed by the GAAP. This way, there is expected a great difference that will require the organizations to adapt to new applications in their taxation processes with the exit of the GAAP and the entry of the IFRS system in their accounting functions (West et al 2004).
Finally, the shift from the local method of accounting will shift the organizational operations from the local settings to international platforms. This will result to the independence of the organization from the local economic environment and the changes experienced therein and will set the organization to a standard where It will be influenced by the overall changes experienced in the global economy. Since the global economy is more stable than the local economy, then there will be a great impact of stabilizing the operations and overall position of the organization and hence resulting to the growth of an organization.