IASB/FASB the IASB Is the Research Paper

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Under GAAP, reversal of an inventory writedown is not permitted. Under IFRS, reversal of an inventory writedown is permitted. If the writedown has been recognized in previous years, the reversal can be conducted through the income statement of the year in which the reversal occurs, not the year in which the initial writedown occurred (Lajara, 2008).

There are significant differences between cash accounting and accrual accounting. Cash accounting has transactions recorded in accordance with the timing of the cash flows. By contrast, the accrual method has transactions recorded in accordance with the timing of the transaction itself. The cash method is simple and easy to understand. However, it also can lead to significant distortions and that makes it unsuitable for financing reporting. For example, a massive sale at the end of the year would not be recorded if the payment for the sale was not received until the following year. This makes the first year look worse than it actually was (since most of the work that went into generating the sale took place in that year) and the second year look better than it actually was (since no work from that year went into the sale).

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In addition to revenue recognition, the differences manifest themselves in many other aspects of accounting, such as inventories, accounts receivable (would these even exist under cash accounting?) and capital purchases. In financial reporting, accrual accounting allows for the creation of the statement of cash flows that provides a sense of the different flows over the course of the year. Cash accounting systems, however, have a more difficult time reconciling the different accrued transactions. Again, this is a weakness in cash accounting and is one of the reasons why only accrual methods are used in the preparation of financial statements.

If a were to use cash accounting, not only would it run afoul of the SEC for not following GAAP but it would also have financial statements that did not accurately reflect the state of its business over the past quarter or year. The company would only have a sense of cash flows, whereas accrual accounting introduces distortions to those flows deliberately in order to allow the statements to more accurately reflect the business in which the firm engaged over the previous time period.

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