Essay on Global Expansion of Business: Benefits of Universal Accounting Standards

Introduction

The expansion of business organizations internationally has been instrumental in the creation of practice universal accounting standards which help promote business transparency, accountability, and economic efficiency for companies operating at a global scale. The comprehensive international business and accounting standards help international brands to comply with tax requirements in different countries where they operate (Rathke, Santana, Lourenco, & Dalmacio, 2016). The universal accounting standards helps business organizations to price their international products, factor currency rates fluctuations, and also support the global payment methods available for the international business organizations. The following are the critical universal accounting practices and standards;

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The International Financial Reporting Standards (IFRS)

The IFRS is a recognized mandatory accounting basis that is widely accepted by organizations that are listed in the stock exchanges within the European Union. The IFRS is widely accepted by major business players in the world such as New Zealand, South Africa, Australia, Brazil, Canada, and the Republic of Korea. Japan has shown interest in implementing similar accounting standards, whereas China has created the same system, which significantly resembles the IFRS virtually (Shimamoto & Takeda, 2018). Business organizations significantly benefit from using the IFRS due to the high comparability, investor empowerment, and promotes informed financial decision making by businesses.

Generally Accepted Accounting Principles (GAAP)

GAAP presents a set of accepted financial accounting principles and procedures that organizations and financial accountant's uses to compile financial standards (Turlington, Fafatas, & Oliver, 2019). GAAP is a combination of both authoritative standards set by the policy boards and the commonly accepted reporting standards which are vital in promoting proper financial information reporting.

Business and Accounting Practices in Chile

In Chile, financial reporting for businesses is established by the Companies Law No. 18.046 that was formed. The audit firms are regulated at the state level in Chile. However, there is a lack of an independent audit oversight organization or authority in Chile (Fortin, Hirata Barros, & Cutler, 2009). The IFRS is a highly accepted financial reporting program in Chile for the domestic public companies and the listings of foreign companies. The small to medium enterprises are also required to conform to the IFRS standards in financial reporting (Fortin et al., 2009). As such, the use of IFRS is permitted but not made mandatory for domestic companies. Since 2004, Chile has fully adopted the IFRS standards under the Chilean Ministry of Finance.

Comparison between the United States and Chili Financial Accounting Standards

There is a significant difference between the United States and Chile financial accounting standards. The primary difference between the United States and Chile accounting standards is that in the United States last in and first-out (LIFO) is used as an inventory costing method whereas in countries where IFRS is in use such as Chile the LIFO system is banned (Turlington et al., 2019). Whereas Chile uses IFRS, the United States uses GAAP financial accounting standards. Further, in the United States GAAP allows the use of lower of cost or market in carrying out inventory with the market being classified using the current replacement cost (Sedki, Posada, & Pruske, 2018). On the other hand, in Chile, IFRS uses the lower of cost or the lowest realizable value in which the selling price minus the costs of complete product is used in inventory accounting. GAAP does not allow the revaluing of assets, whereas IFRS in Chile allows revaluation, although based on fair value but regularly for the long term assets (Gordon & Hsu, 2019). GAAP is more comprehensive in terms of financial accounts for companies with statements for comprehensive income being added on top of the income statement, changes in equity, balance sheet, and the cash flow statement which is the standard for the IFRS in Chile (Mongrut & Winkelried, 2019). Lastly, GAAP is considered a rule-based financial accounting standards system with specific cases rules which do not represent the more significant financial principle. IFRS, on the other hand, has a principle-based financial reporting system which does not support individual cases regulation standards (Gordon & Hsu, 2019).

Conclusion

In conclusion, there is a significant difference between the United States GAAP and Chile's IFRS financial accounting standards. The standards differ mainly on the inventory accounting and the company's financial earning accounting. The primary similarity of the United States and Chile's financial accounting standards approach is that both seek to promote corporate transparency and accountability.

References

Fortin, H., Hirata Barros, A. C., & Cutler, K. (2009). Accounting for Growth in Latin America and the Caribbean: Improving Corporate Financial reporting to Support Economic Development. The World Bank, Washington D.C Retrieved from http://siteresources.worldbank.org/EXTGOVANTICORR/Resources/3035863-1285093935613/AccountingGrowthinLAC.pdf

Gordon, E. A., & Hsu, H. T. (2019). Determinants of Tangible Long-Lived Asset Impairments under US GAAP and IFRS. Available at SSRN 3372609. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3372609

Mongrut, S., & Winkelried, D. (2019). Unintended effects of IFRS adoption on earnings management: The case of Latin America. Emerging Markets Review, 38, 377-388. Retrieved from https://www.sciencedirect.com/science/article/pii/S1566014118301328

Rathke, A. A. T., Santana, V. D. F., Lourenco, I. M. E. C., & Dalmacio, F. Z. (2016). International financial reporting standards and earnings management in Latin America. Revista de administracao contemporanea, 20(3), 368-388. Retrieved from http://www.scielo.br/scielo.php?pid=S1415-65552016000300368&script=sci_abstract&tlng=pt

Sedki, S. S., Posada, G. A., & Pruske, K. A. (2018). Differences Between US GAAP and IFRS in Accounting for Goodwill Impairment and Inventory: Tax Treatment Under the Internal Revenue Code. Journal of Accounting and Finance, 18(4). Retrieved from https://www.articlegateway.com/index.php/JAF/article/view/421

Shimamoto, K., & Takeda, F. (2018). Is IFRS conditionally or unconditionally more conservative than local GAAP? Evidence from Japan. Retrieved from https://efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2018-Milan/papers/EFMA2018_0169_fullpaper.pdf

Turlington, J., Fafatas, S., & Oliver, E. G. (2019). Is it US GAAP or IFRS? Understanding how R&D costs affect ratio analysis. Business Horizons. Retrieved from https://www.sciencedirect.com/science/article/pii/S0007681319300448