Essay Example on Global Accounting Standards: IFRS vs. GAAP

Introduction

Currently, we are in an increasingly global economy, so it is essential for accounting professionals and business owners to know the differences between the two predominant methods used in the world. The two methods include International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). The IFRS is a global standard that was established by the International Accounting Standards Board (IASB). At the same time, the GAAP was developed by the Financial Accounting Standards Board (FASB) and is used in the U.S. Goodwill consists of substantial assets for various countries, specifically the ones that are operating in industries using high technology (Commission 2011). There have been significant changes in the standards associated with accounting for goodwill because of the growing importance of intangibles. Goodwill can be viewed as an intangible asset only if it is gotten from a business combination. The goodwill that is internally generated cannot be capitalized since it is unidentifiable and inseparable from the other assets. IFRS claims that goodwill is measured initially and recorded as the difference between the acquisition cost over the interest of the acquirer in the net fair value of the contingent liabilities, liabilities, and identifiable assets. Recognition of goodwill necessities the valuation of fair values of all tangible and identifiable intangible assets. In IFRS, goodwill ought to be measured at the cost reduced by any accumulated impairment charge. Moreover, the impairment test for goodwill should be annually or often when the circumstances show that it could be impaired.

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On the other hand, US GAAP identifies that goodwill should be documented as the excess of the acquisition cost over the net fair value of the acquired assets. It is only recorded in a situation whereby the carrying goodwill amount surpasses its implied fair value. In US GAAP, when evaluating goodwill for impairment, companies or businesses should first assign the bought goodwill to reporting units. Besides, there is a difference in the method of evaluation in the two accounting methods. In IFRS, the evaluation method does not use the two-step process, but in US GAAP, the evaluation method of goodwill involves a two-step process. Jerman and Manzin (2008) research supported that under IFRS, the fair value is different compared to the US GAAP since the IFRS does not put into consideration the impact of the current liabilities. However, there exist some similarities; in both accounting methods, any discount incurred during acquisition is accounted for in the profit and loss statement. Moreover, in both accounting methods, the reversals of any impairment loss related to goodwill are not allowed.

Amortization of intangible assets

The colleague might or might not be correct since it depends on the type of intangible assets they are referring to. There exist two main types of intangibles assets, legal intangibles, and competitive intangibles. Legal tangibles encompass trademarks, patents, copyrights, and trade secrets. On the other hand, competitive intangibles include structural activities, leverage activities, collaboration activities, and knowledge activities. Intangible assets are amortized to reflect their obsolescence, expiry, consumption, or another decline in value (Ali and al-Masoodi 2018). The decrease in value is due to the passage of process, time, which is the same as the deprecation process for tangible assets. Intangible assets that have limited life are amortized on a straight-line basis over their legal or economic life. These intangible assets having a limited life comprises of patents and copyrights. Nevertheless, patents have a legal life of around 20 years, but its useful life might be shorter. Therefore, patents can be amortized depending if it is using the legal life or shorter of the two. Some of the intangible assets have indefinite lives; hence they cannot be amortized at all over the legal lives. Since the indefinite life, intangible assets continue to generate the cash they cannot be amortized, and they should be evaluated for impairment annually. Examples of indefinite life are perpetual franchises and trademarks.

Besides, if the colleague is talking about goodwill, then he is wrong about the amortization of legal lives. Goodwill is an intangible asset that is annually tested for impairment, and it cannot be amortized. Indefinite life intangibles assets are not amortized since they lack a foreseeable limit to the cash flows they generate. The indefinite life intangible-assets have no competitive economic, regulatory, contractual, or legal limiting factors. The IRS designates that the intangible assets should be amortized over 15 years under section 197 (Wyatt and Abernethy 2004). Section 197 indicates that the amortization rules apply only to some specific business assets, not all. The applicable intangible assets are the ones that are acquired and not created, which includes goodwill, going concern value, copyright, patent, trademark, franchise, permit or license granted by a government agency or unit. However, the IRS indicates that the mentioned assets cannot be amortized if they were created unless the assets were created when acquiring assets that make up a business or trade. The non-applicable intangible assets that are not considered in section 197 hence cannot be amortized over 15 years includes sports franchises, patents, and copyrights. Nevertheless, these assets can be amortized if they are obtained as part of a business purchase.

Should goodwill be sold to raise cash?

Goodwill signifies the value of various positive attributes that are entangled in the business. Goodwill is only identifiable with the organization as a whole and not like the other assets; it cannot be purchased or sold separately. Goodwill represents a miscellaneous section of intangible assets that are difficult to measure directly or parse out individually. Examples of goodwill include brand reputation, customer loyalty, and any other non-quantifiable assets. Besides, goodwill also involves the records of a company in terms of research and development and innovation and its management team experience (Slavin 2006). Based on this, it is evident that goodwill cannot be independent; it only exists through business and cannot be transferred, purchased, or sold separately. Goodwill can only show up on a balance sheet if two businesses complete an acquisition or merger. Hence the only way our company can sell its goodwill is through either selling the whole business, which is impossible or merging with another company. Goodwill appears on the balance sheet when one company buys another organization and pays beyond and above the net value of the identifiable assets. The net worth above the purchased company identifiable assets is recorded as goodwill in the balance sheet. Moreover, it is not advisable to sell goodwill since it determines the short term and long term success of the business (Guler 2018). Assessing the goodwill accurately, one ensures that they do not overpay. Based on this, I can enlighten my colleague that goodwill cannot be used to raise cash by selling it. Goodwill can only be sold if the business is sold as a whole. For instance, customer loyalty and brand name cannot be measured or quantified, and therefore they are assets that cannot be sold.

Bonds

Bonds are the most well-known type of debt instrument that is used by governments and private corporations. In the investing world, bonds are normally viewed as a relatively safe investment. Highly rated government or corporate bond comes with little or no perceived default of risk (Association 2011). There exists various types of bonds, Secured and unsecured bonds, term and serial bonds, and registered and bearer bonds.

Secured and unsecured bonds have various differences. Secured bonds have particular assets of the issuing company assured as a guarantee or collateral. As a result, the bond gives protections to the bondholders and their investments in a way that when the issuing company fails to pay the principal amount and interest payment upon maturity, the bondholders have the right to demand the auction of collateralized or secured assets to reimburse the bond obligations. Consequently, the unsecured bonds are also referred to as debentures, and they lack any collateral assets that are pledged through the issuing company. Rather, the bondholders determine the credit rating of the company before they invest their funds in the bond. In unsecured bonds, the issuing firm ought to have a strong financial statement that has a well operating and good cash balance so that it can entice investors in lending them money. To sum up it all, the unsecured bonds yield higher interest rates in comparison to the secured bonds.

Term and serial bonds are other types of bonds. Term bonds represent a series of bond issues that have become in arrears on a certain specific date. Term bonds can either be long term or short term. Moreover, term bonds can be converted or retrieved to other investments before the arrival of the maturity date. On the other hand, serial bonds involve bond issues whose component sections become mature at various times. Lastly, registered and bearer bonds are other essential bonds in the business (Foundation 2010). Registered bonds are the ones delivered in the addresses and names of their holders. The issuing company gives interest payments in terms of checks which are payable to the registered owners and home-delivered. On the other hand, bearer bonds are bonds that are payable to whoever holds them. In bearer bonds, there is no record keeping; hence whoever has the title of the bond on the maturity or payment date will be assumed to be the lawful owner. Based on this, stolen or lost bearer bonds are hard to replace and trace.

Memorandum

TO: Investors

FROM: Business Owner

SUBJECT: Bonds Investment Option

DATE: 4/19/20

The primary purpose of this memo is to elaborate on the bond options available to the investors and recommending the best. When it comes to bonds investment, the most crucial thing is to understand what each type entails, the returns it has, and the risks associated with it. Bonds are more predictable and stable, but they all vary depending on the bond type. There are two primary two types, secured and unsecured bonds. The best option I would recommend to the investors is secured bonds. This is because secured bonds are less precarious in comparison to the unsecured bonds since the investors are reimbursed some part of their investment in case of a default. Besides, unsecured bonds are not given any backup by any collateral and are thus more sensitive to the financial performance of the company. For example, if the company fails to pay the debt obligation of the bondholders, the outcomes for secured bondholders will be different from the bold unsecured holders. For the secured bondholders, they have the right to sell the collateral to recover their money, while unsecured bondholders are powerless and do not have any claim on the reserves or assets of the company. Based on this, the best-recommended bond option is the secured bonds.

Market Price of Bonds

I do not agree that the market price of bonds is solely a function of the amount on principal payment. Anytime a person buys a bond, it is loaning money to the government or corporation that issued it. Every bond has its face value, which involves the total amount of money the government or company should give you to pay back once borrowed. When an investor holds the b...