Milestone One

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Southern New Hampshire University *

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610

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Accounting

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Apr 3, 2024

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Milestone One: GAAP vs. IFRS Kailyn Berkheiser October 6 th , 2023 ACC 610 Financial Reporting

2 GAAP vs IFRS It is crucial to examine the distinctions between each style before making a big switch from one reporting approach to another. The use of IFRS and GAAP differs significantly depending on the region and the regulations and principles that are followed there. According to IFRS vs GAAP Accounting... (2019), GAAP is more rules-based and solely used in the United States, whereas IFRS is more principles-based and utilized in more than 110 nations worldwide. This means that whereas IFRS employs judgment and interpretation in specific circumstances, GAAP is more likely to include standards and guidelines that are industry specific. Target must be aware of still another distinction when switching to IFRS, namely how it handles inventory differently from GAAP. While IFRS can only use FIFO because LIFO is not authorized, it also permits the reversal of prior write-downs if the value increases (IFRS and GAAP Accounting..., 2019). GAAP can use both FIFO and LIFO procedures but doesn't permit the undoing of earlier write-downs. When converting to IFRS, Target will need to make the necessary adjustments to FIFO if it currently employs LIFO for any inventory processing. Additionally, they would have to get ready for any changes in market value for any write-downs. In contrast to GAAP, which only permits it for marketable securities, IFRS permits revaluation of fair value for inventories, property, plant & equipment, intangible assets, and investments in marketable securities (IFRS vs GAAP Accounting..., 2019). With regard to these assets, Target would need to adjust their reporting procedures. Impairment losses, intangible assets, fixed assets, investment property, and lease accounting are other areas where the two are different from one another. In contrast to GAAP, which forbids such reversals, IFRS will let the corporation to reverse impaired losses for any assets other than goodwill when conditions alter (IFRS vs GAAP Accounting..., 2019). Both

3 intangible and fixed assets are valued at market value under IFRS, which also takes advantage of internal expenditures incurred in developing and generating intangible assets (IFRS and GAAP Accounting..., 2019). When reporting fixed assets and expenses, GAAP generally considers historical cost rather than actual development costs. When it comes to real estate kept for rental revenue or capital appreciation, IFRS reports it, but GAAP does not (IFRS and GAAP Accounting..., 2019). As a final point, IFRS permits lessees to eliminate leases for low-value assets, whereas GAAP does not permit this exception (IFRS versus GAAP Accounting..., 2019). As they make the transition to IFRS, Target would need to be aware of these variances in reporting. In order to compete successfully in a global market, they would have to modify and adapt to these new standards. How balance sheets and cash flow statements differ would be another important development for Target. According to GAAP, current assets are listed first, however according to IFRS, non-current assets are listed first (Gavin, 2019). In order to make room on the balance sheet for other assets like property, plant, and equipment, Target would need to move the cash, accounts receivable, or marketable securities that are shown as current assets down from where they currently are. According to GAAP, the accounts are typically listed from most liquid to least liquid, however IFRS follows the opposite order (Gavin, 2019). The classification of interest and dividends in the statement of cash flows differs significantly from that in the income statement. According to GAAP, interest and dividends must be reported as operating expenses or in the financial part, but IFRS is more flexible and lets the corporation decide how to classify them (Gavin, 2019). Target will find it difficult to maintain their current reporting practices under GAAP for their balance sheet and statement of cash flows in light of these developments. In

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4 order to follow the IFRS rules, Target would need to teach their employees in these new reporting techniques. Target would have to evaluate the data following a comparison of the two procedures before taking the necessary actions to switch to IFRS. Target's initial action is to conduct an account gap analysis, which can take anywhere between 4 and 8 weeks and is meant to help Target spot any potential disparities (Bogle, 2019). This can assist Target structure and carry out a plan while also winning management's support for the change. Target would then have to implement IFRS 1, First-time Adoption of IFRS. In order to achieve this, IFRS must be applied retroactively with a few obligatory exceptions, discretionary exclusions, and certain disclosures (Bogle, 2019). Any new revenue recognition criteria would be put into effect by Target in the third stage. The bulk of these already adhere to GAAP guidelines, but others, like the lease assessment, have variances that Target would need to fix in order to comply with IFRS guidelines (Bogle, 2019). The next step would be for Target to prepare for potential additional complications. Each regulatory framework may introduce new issues, such as pro forma financial data, separate acquiree's financial reporting, and accounting reconciliations (Bogle, 2019). Finally, Target would need to be prepared for how the changes will impact other departments. This conversion would be more than just an accounting exercise because it affects systems, processes, people, and other business areas that Target would need to take into account while moving forward with the conversion (Bogle, 2019). By adopting these actions, Target will be able to transition more smoothly and overcome any obstacles that may arise.

5 References Bogle, K. Converting from US GAAP to IFRS. Retrieved October 2, 2023, from https://advisory.kpmg.us/articles/2017/converting-from-us-gaap-to-ifrs.html Gavin, M. GAAP vs. IFRS: What's the Difference and Which Should You Use?: HBS Online. Retrieved October 4, 2023, fromhttps://online.hbs.edu/blog/post/gaap-vs-ifrs IFRS and GAAP Accounting: Top 10 Differences & Effects on Business. (2019). Retrieved October 4, 2023, from https://www.firmofthefuture.com/content/top-10-differences- between-ifrs-and-gaap-accounting/ Page, V. How Target Can Expand Internationally. Retrieved October 5, 2023, from https://www.investopedia.com/articles/investing/120815/how-target-can-expand- internationally.asp Palmer, B. International Financial Reporting Standards (IFRS). Retrieved October 3, 2023, from https://www.investopedia.com/terms/i/ifrs.asp Tuovila, A. Generally Accepted Accounting Principles (GAAP). Retrieved October 6, 2023, from https://www.investopedia.com/terms/g/gaap.asp