The accounting profession is a unique field where laws and regulations govern the practices involved in it. With the technological, economic, and cultural advancement, there has been the development of other practices favoring the business environment in which companies operate. The paper discusses the intellectual capital and Financial Reporting Standards and how they differ from the Generally Accepted Accounting Principles (GAAP).
Part one (Intellectual Capital)
Intellectual capital is the proficiency and process of know-how confined to a particular organization. When the intellectual capital gives the organization a competitive edge, then the firm’s valuation comes from proficiency and knowledge. It involves valuing intangible assets in an organization like skills, knowledge, innovations, and good relationships among employees. Organizations that do not value their intellectual capital engage in opposing employee management practices, leading to valuable employees leaving the company. On the contrary, firms that use intellectual capital tend to follow extensive plans for qualified and knowledgeable hiring and training employees. An example of intellectual capital in use in real life is the investment in innovation and the development of a secret recipe for the production of soft drinks by the Coca-Cola company (Fernández, 2019). Valuing intellectual capital differs from the Generally Accepted Accounting Principles. It focuses on the organization’s competitive edge in the market and business field by maximizing the employees’ innovativeness, knowledgeability, and qualification standardization. The processes and costs used in the intellectual capital are not included in the organizations’ financial statements, which contradicts the rules and standards set by the policy boards for accounting.
In contrast, the Generally Accepted Accounting Principles are globally established list procedures and principles set by the Financial Accounting Standards Board (FASB) for accounting to be followed and adhered to by all public companies in the U.S. The GAAP aims to improve clarity, comparability, and consistency during the relaying of the financial information of the companies. The consistency is maintained through the compilation of financial information in the companies’ financial statements.
Intellectual capital has its pros and cons. The pros of the practice in a company include; that it helps enhance the company’s competitive advantage over other competitors in the market as it focuses on its strengths. It facilitates innovation through the hiring of highly knowledgeable personnel into the company (Kadim et al., 2020). It helps build a group of competent and skilled employees, leading to improved productivity as the company produces the best quality products and services. It leads to an improvement in the company’s performance and profitability (Xu & Wang, 2018). Even though it has pros, the practice has cons as well. The cons of the practice in a company include; that the behavioral dynamics and impacts on the economics of the organization are not calculated. The companies do not have systems in place to determine the effectiveness of transferring knowledge. The approaches do not account for particular departments or workers but the whole organization.
Intellectual capital valuing is popular in many companies around the world today. Companies in both third world and the developed countries are adopting the practice to enhance productivity in their businesses. The practice is used most by technology and manufacturing companies like Google and Coca-Cola. The practice has a future in the global business arena as companies are used to it as the only means of survival.
Part two (International Financial Reporting Standards, IFRS)
International Financial Reporting Standards are universal set of rules and regulations set for accounting practices in companies that regulate the transactions and accounting practices in financial statement reports. The IFRS are intended to make companies easily comparable through similar procedures in the preparation of financial statements for their businesses. They use common accounting language that is easily understandable by global auditors, investors, and governmental regulators. The IFRS is formulated to ensure integrity and transparency in the financial arena (Picker et al., 2019). The integrity and transparency aspects enable the investors and stakeholders to make up-to-date decisions on financial matters. The IFRSs are allotted by the International Accounting Standards Board (IASB), and they use a common format for proper understanding and uniformity in different companies from different countries. Examples of the use of IFRS in real life today include; companies in countries being required to use IFRSs to formulate financial statements, requiring countries from outside a particular country who are on the list of Domestic stock exchanges to adopt IFRSs, to require that companies use IFRSs rather than GAAPs. The International Financial Reporting Standards differs with the Generally Accepted Accounting Principles in that the IFRSs are a global set of rules that are applicable in most countries around the world; they are principle-based, meaning they need judgement to establish how will be used in specific situations, the IFRSs do not allow the use of Last In, First Out (LIFO) method in inventories valuation, the IFRS allow write-downs of inventory market value to be reversed in case of the market value increases, they allow fair value revaluation of market securities. The IFRSs value fixed assets but can later be revalued based on market value changes, and the IFRSs include different classes of investment property.
In contrast, the GAAPs are local since they are only used in the U.S (Weygandt et al., 2019). The GAAPs tend to be rule-based, where the companies have specific guidelines and rules to adhere to in their financial operations. The GAAPs allow the use of the Last In, First Out (LIFO) method in the inventory valuation. They prohibit write-downs of inventory market value, meaning they cannot be reversed, the revaluation of market securities is prohibited, the valuation of fixed assets is done at historic costs, and they do not have categories of investment property.
The IFRSs have pros and cons in a company or country, where the pros include; they make it easy to compare companies’ ratings, it is a globally synchronized system of procedures, ensures there are cautious management practices where the long-term investments are safer (Wahyuni et al., 2020). The adoption costs are reduced since there is informed decision-making on certain situations the company faces. They improve transparency and communication of information. Even if the IFRS has pros, it also has its cons; it lacks many details. There also occur costs in adopting the system like implementation and rehabilitation costs. Lastly, it isn’t easy to adapt to different countries since the capital markets differ. Many countries around the world commonly use IFRSs. Many companies use the system for accounting practices since it is an international body for equal financial procedures and protocols. Examples of where IFRS can be used are in banks, manufacturing companies, and the stock exchange markets in countries where the system is adopted. Based on the current need for financial transparency in companies in the U.S and other countries, it is certain that the IFRSs have a future in the business arena globally. The U.S, which has not adopted the system, has shown goodwill for its adoption in the country soon.
In conclusion, global business is rapidly changing with innovations making their way into the business sector. Companies result in practices that give them a competitive edge over their business counterparts. Countries use the globally instilled practices in their business operations to allow uniformity. IFRS is gaining popularity world, which is good for healthier competition among companies and different countries.
Fernández, P. (2019). Valuation of brands and intellectual capital. SSRN.
Kadim, A., Sunardi, N., & Husain, T. (2020). The modeling firm’s value based on financial ratios, intellectual capital, and dividend policy. Accounting, 6(5), 859-870.
Picker, R., Clark, K., Dunn, J., Kolitz, D., Livne, G., Loftus, J., & Van der Tas, L. (2019). Applying IFRS standards. John Wiley & Sons.
Wahyuni, E. T., Puspitasari, G., & Puspitasari, E. (2020). Has IFRS improved accounting quality in Indonesia? A Systematic Literature Review of 2010-2016. Journal of Accounting and Investment, 21(1), 19-44.
Weygandt, J. J., Kieso, D. E., Kimmel, P. D., Trenholm, B., Warren, V., & Novak, L. (2019). Accounting Principles, Volume 2. John Wiley & Sons.
Xu, J., & Wang, B. (2018). Intellectual capital, financial performance and companies’ sustainable growth: Evidence from the Korean manufacturing industry. Sustainability, 10(12), 4651.