Which US accounting practices seem out of

Which US accounting practices seem out of line with those of many other countries? What explanations are there for this?
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Chapter 7 Questions 3
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Which US accounting practices seem out of line wit...See More
Answer:


Here is a list of some of the cases where the United States is out of line with at least several other major countries.



(a)        Strict historical cost for tangible fixed assets. Although Germany and Japan share this US feature, most countries do not. Some allow optional revaluations without tax disadvantage (e.g. United Kingdom, Australia); some have governmentally demanded revaluations from time to time (e.g. France, Italy, Spain); some have compulsory indexation (e.g. Brazil, Argentina) and some have voluntary but controlled revaluations (e.g. Sweden, Korea). IFRS allows revaluations. The SEC's influence seems to have been at work in the United States in opposing the subjectivity involved in revaluations.



(b)        The use of fair value for certain marketable securities. US rules now require trading and available-for-sale securities to be held at fair value. The gains and losses go to income (for trading) and other comprehensive income (for available-for-sale). Although financial institutions in several countries value some investments at market, the US practice is not normal in other countries for most companies unless IFRS is followed.



(c)        No capitalization of research and development expenditure (except software) or set-up costs. Most countries (and IFRS) allow some of these expenses to be capitalized, but the Financial Accounting Standards Board (FASB) has gone for the prudent approach, which is easier to check.



(d)       Lack of standardized formats and terms. In most developed countries, standardized formats of financial statements (including technical terms) are required by law, accounting plan, and so on. The extent of this in the United States (and IFRS) is not so well developed. This may be because of the lack of general regulatory framework or because the FASB and SEC see this as a trivial issue.

There are several US accounting practices that differ from those of many other countries, including:

Generally Accepted Accounting Principles (GAAP): The United States uses GAAP, a set of accounting principles and rules developed by the Financial Accounting Standards Board (FASB), which differs from International Financial Reporting Standards (IFRS) used by many other countries.

LIFO (Last-In, First-Out) Inventory Accounting: LIFO is a common inventory accounting method used in the United States, but it is not allowed under IFRS. Under LIFO, the cost of goods sold is based on the most recent inventory purchases, which can result in lower taxes during periods of inflation.

Stock Options: Stock options are a common form of compensation for US executives, but they are less common in many other countries.

Deferred Taxes: The US accounting system recognizes deferred taxes, which are taxes that will be paid in the future but have not yet been incurred. Many other countries do not recognize deferred taxes.

Segment Reporting: US companies are required to report financial information by operating segment, while many other countries require reporting by business segment.

It is worth noting that many of these differences are being addressed through ongoing efforts to converge US GAAP and IFRS.