Case Study 1 Having spent 20 y

1) Mohammed in right in his argument that adopting US GAAPprovides an accountant a detailed and specific guideline forfinancial reporting than IFRS. The reason is that IFRS areprinciples-based whereas GAAP are rules-based. As a result ofwhich, there is more scope for different interpretations whileapplying the theoretical framework and principles of IFRS for whichdetailed disclosures need to be made in the financial statements.However, principles contained in IFRS are more logically correctbecause they represent the substance of business transactions in abetter way.

2) No, Mohammed has not followed IFRS due to the followingreasons-

A) After his joining, the company has followed LIFO method forinventory valuation which is not allowed as per IFRS rules but USGAAP allows its use.

B) Mohammed has used two step method for writing off impairmentlosses which is not in accordance with IFRS rules where one stepapproach requires impairment testing to be performed on existenceof impairment indicators.

C) Mohammed has not reported revenues as per IFRS on revenuefrom contracts with customers which recommends a five step modelfor recognition of revenue. However, he has underestimated revenuesby following a much strict policy.

D) Mohammed is not following IFRS because he has not reportedthe loan on which the bank has issued a letter to the company forrepayment under current liabilities, however as per IFRS,liabilities which are to be settled within a period of 12 monthsshould be classified as current liabilities.

E) All the expenses towards the repairs and maintenance of plantand machinery are treated as operating expenses in the financialstatements where IFRS provides for capitalisation of costs of apreviously identified component if there is a probability of futureeconomic benefits for the entity and its measurement can be donereliably.

3) Yes, accounting standards are required for preparing thefinancial statements because their main objective is to facilitatetransparency, reliability, comparability and consistency offinancial statements. They help in standardisation of accountingpolicies and principles of a country with a view to record thetransactions of all companies in a similar manner. They provide theframework of rules and regulations for reporting and accounting ina country with a view to enhance the confidence of the users offinancial statements. Accounting standards present a true and fairview of the financial position of an entity.