Question: Competency: Critique the development of International Accounting Standards and the implications for US corporations.
Scenario: CM Corporation (CMC) was founded six years ago by Phil Connor and Eric Martin. The company designs, installs, and service security systems for high-tech companies. The founders, who describe themselves as "entrepreneurial geeks," met in a computer lab when they were teenagers and found they had common interests in working on security systems for critical industries. CMC hired you as a junior accountant this year.
Lately, Connor and Martin have been working with "radio frequency identification" (RFID) technology. They have developed a detailed system designed to track inventory items using RFID tags embedded invisibly in products. This technology has numerous inventory applications in multiple industries.
One of the most basic applications is tracking manufacturing components; if tagged components "go walking" (if employees attempt to take them), companies can easily track and find them. Connor and Martin have sold their system to several high-tech companies in the area. These companies have a number of government contracts that require extensive security systems to protect sensitive data from infiltration by terrorists and others. To date, CMC's cash flow from sales and services has adequately funded its operations.
CMC expects much growth potential for its products. As a result, they are considering going public and expanding internationally in the near future.
Instructions: Connor and Martin are contemplating international business in their industry and feel that global expansion is a great transition for the company. They do not feel as if they understand IFRS and are in need of clarification of both implications and convergence factors that may affect the expansion. They have asked you to prepare a memorandum to help them understand the differences in US GAAP and IFRS Standards, as well as what the costs will be in making the change.
Research the following topics and prepare a memorandum on your findings:
What are the major factors in converging from US GAAP to IFRS Standards?
Will switching accounting standards be costly for the firm? Explain your reasoning.
How does IFRS differ from GAAP regarding international transactions? Are there issues in accounting for international transactions?
What is your final recommendation on whether CMC should converge to IFRS or GAAP? Explain your reasoning.
Memorandum Mechanics should be as follows:
The body of the memorandum should be a professional presentation centered on clear and concise writing. The responses to the questions should be detailed, well researched, and specifically related to CMC's industry.
Use the FASB Codification and IFRS to address all technical accounting issues presented in the questions, being certain to reference the applicable sections of the Codification and IFRS in your report.
All sources used to support your responses should be properly documented. You should have other credible sources in addition to the Codification and IFRS.