Auditing Case Solution
Describe the difference between the IFRS and US GAAP in handling the situation described and methods that must be followed.
Treatment under the IFRS
A provision is a liability of the uncertain timing or amount. A liability is a present obligation of the entity arising from the past events, the settlement of which is expected to result in an outflow from the entity resources embodying economic benefits.
A provision should be recognized when following conditions are fulfilled.
1- An entity has a present obligation as a result of past event
2- It is probable that an outflow of cash will be required to settle the obligation.
3- A reliable estimate can be made of the amount of the obligation.
A provision may be necessary as a result of,
1- A legal
2- A construction obligation.
The legal obligation is an obligation that derives from the contract and the legislation. Furthermore, construction obligation arises based on the past practice, where the entity has indicated to other parties that it will accept certain responsibilities.
Applying the standard to the Energy Inc. situation:-
In this case, it is indicated that in some countries there is no legislation requiring the cleanup. This further indicatesthat the currently there is no present obligation to clean up. Therefore in this case, the provision will not be made.
However, the case indicates that after October 31, 2016, the remediation of contaminated land will be enacted in this jurisdiction after whichthe provision must be recorded in the financial statement.
Treatment under the US GAAP:-
The US GAAPdoes not follow the concept of the provision. However, US GAAP statesthat the company should record expense when the incurred expense (i.e. clean up cost)
How do the different approaches impact users of a financial statement?
Mostly the users of the financial statements are the shareholders who invest in different companies. Some companies follow the international financial reporting standards (IFRS) and some follow the US GAAP. The different approaches affectthe users of the financial statement in making the decision regarding making the investment.
In this case, under the IRFS, the company is required to record a provision as a liability, however the US GAAP does not follow the concept of provision. Further differences include the valuation of the inventory because IFRS does not allow the LIFO method whereas,US GAAP allows the FIFO method. These differences affect the balance sheet and ultimately affect the decision of the users.
What does the difference in accounting standards mean to accountants working at multinational firms such as Energy Inc.?
Different accounting standards follow the different accounting techniques such as IFRS follows the concept of provisions however,the US GAAP does not follow the concept of the provisions.
The accounts working at the multinational firms must be aware of the treatment of the both accounting standards and must follow the rules stated under the accounting standards.
Furthermore, the accountants must be aware of the current issues regarding the both accounting standards because it will help in preparing the financial statements according to the required standards…………………………………………………
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