subject: GAAP vs IFRS and Globalization [print this page] GAAP vs IFRS and Globalization GAAP vs IFRS and Globalization
Throughout the years in our business society, accounting has played a significant role in the way businesses use their money, earn money, and retain money. Accounting practices have always relied on two standards to make sure they are following the right procedures: GAAP (Generally Accepted Accounting Principals), and the IFRS (International Financial Reporting Standards). These global accounting standards improve the functioning of global capital markets by providing better information to investors and other users of financial statements. The United States used GAAP primarily, while out countries outside use IFRS. Soon, accounting standards will change from GAAP to IFRS. To understand these changes, we must understand the major differences between the two standards, the advantages of having the change, and the disadvantages of the change.
Both sets of standards use many of the same financial statements: balance sheet, income statement, other comprehensive income, cash flows and accompanying notes to the financial statements. Further, both US GAAP and IFRS require that the financial statements be prepared on the accrual basis of accounting. But these financial statements are not prepared the same way.
For GAAP, there is no presented guide for presentation of the statements. The IFRS is given a list of minimum items they must have, but there is no strict rule for accordance to any specific layout. For the United States, most companies use the same layout that has been generated throughout the years, but there is still no rule to follow any specific one. Also when using GAAP, you are required to present expenses based on function (for example, cost of sales, administrative), whereas the International Standard allows users to present assets based on nature (for example, salaries, depreciation). I feel the International standard is easier because it cuts down on the names of different accounts.
When reporting in financial statements, GAAP users are required to present balance sheets for the two most recent years, while all other statements must cover the three-year period ended on the balance sheet date. IFRS users must user the previous year's amounts for the financial statement. I feel this way makes financial reporting less stressful; looking at 1 year of financial loss is better than looking at three years of financial loss.
In the past, the United States has used three different ways to record inventory: LIFO, FIFO, and weighted average. LIFO, known as "last in, first out", was used so that companies could sell newly purchased units that they bought first at a higher price. This is seen as a tax deferral because the companies would be claiming less income and tax on the sale of those units. If the FASB (Financial Accounting Standards Board) were to fully accept IFRS over GAAP, LIFO would no longer be accepted by GAAP standards.
If IFRS was accepted completely as a standard, comparing financial statements would become extremely easier. This would open markets up to hundreds of more business opportunities for companies that want to reach outside of the United States. Every company would follow the same format, cutting down on confusing between formats and reporting procedures. Capital allocation would become more efficient, hopefully creating more income for companies. Communication will be better between standard setters, making standard setting much easier and probably easier to use.
Even though the change to IFRS has its advantages, it also has its disadvantages. Because the GAAP has been used in the United States for so many years, most CPAs do not know how to use IFRS. This will more than likely result in going back to school for more education for those who are already CPAs. Right now, you must have your Master's Degree to become a CPA (in most states). This will affect upcoming CPAs, as well as older CPAs will have to get some education in the subject. Textbooks and classes will be altered; costing publishing companies and schools tons of money. The CPA exam will also need to be changed to show the changes brought upon by the IFRS.
I would have to say that the change to IFRS would not be bad for our accounting world. It would open out markets to so much more business due to the ease of comparability, and more money will be made due to better capital allocation. Formats will finally be set and there will not be as much confusion with financial statements. Even though the thought of more education haunts me as an up and coming account, I hope that the changes brought will be positive to our business world.
1. Major differences in u.s. gaap & ifrs and latest developments. (2009, May 18). Retrieved from http://www.accountingday.org
2. Epstein, B. J. . (2008). Ifrs versus gaap. Retrieved from http://www.ifrsaccounting.com/ifrs-gaap.html
3. Ernst & Young LLP (2009). Us gaap vs. ifrs: the basics [pg 1-52]. Retrieved from http://www.ey.com/Publication/vwLUAssets/IFRS_v_GAAP_basics_Jan09/$file/IFRS_v_GAAP_basics_Jan09.pdf
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