US GAAP AND IFRS – Accounting
Explain the current state of International Accounting Standards and the road map towards convergence. Summarize the key differences between U.S. GAAP and IFRSs. Identify the pros and cons of using each standard. Finally, with the core values of excellence and integrity in mind, determine the best option for the United States (keep our existing standards, converge with IFRSs, or adopt IFRSs).
Introduction
International Financial Reporting Standards are basically designed as a common financial global language for business operations so that a firm accounts are interpreted and compared uniformly all over the world. They are as a result of growing and expanding international shareholding in businesses and other related trading activities worldwide. IFRS is progressively and gradually replacing different national financial or accounting standards globally. All IFRS converge at developing acceptable, comparable, relevant and reliable financial standards universally.
International Financial Reporting Standards began initially as an attempt to converge accounting across the EU but the approach of the harmonization concept became attractive to other nations worldwide. It was originally known as IAS i.e. International Accounting Standards which began and operated between the years 1973 to the year 2001 before IFRS was developed. GAAP is an acronym for generally accepted accounting principles. It’s made up of a series of commonly used accounting rules and practices for financial reporting. These specifications include the accounting terms definitions and the concepts, principles as well as the general accounting rules. The objective of GAAP is to ensure that there is a standard in all companies concerning financial reporting which should be transparent and consistent from one company to the other. (Economist.com, 2008)
The main difference between the GAAP accounting concepts mostly adopted in the USA and the IFRS is essentially the concepts and treatment of capital and its maintenance as authorized or directed by the IFRS. The US GAAP authorizes only two capitals and its maintenance concept mostly during either low inflation or deflation i.e. financial capital maintenance as written in nominal monetary currency or units. (Traditional or Historical Cost Accounting) Part 45 to 48 of the FASB No. 5. The US GAAP doesn’t recognize or recommend the third concept or theory of financial capital and the capital maintenance basically during low inflation and during deflation i.e. financial capital maintenance as written in units of constant or steady purchasing power as directed or authorized by the IFRS in part 104 section (a) in the years 1989.
The major advantage the US stands to gain by converging to IFRS is the comparability hence greater and wider market liquidity and subsequent lower or reduced cost of capital. The Multinational corporations from the US stand to save a lot of cost because they won’t have to maintain several sets of accounting records as IFRS is generally universally accepted. Changing to IFRS would certainly allow different people to compare similar financial statements written on the same standards and concepts. (Hail, Luzi, Leuz, Christian, Wysocki and Peter, 2009)
The other primary difference between IFRS and US GAAP is that the IFRS HAS wider and less specific concepts and guidance applications which gives more room for interpretation. Accountants have the opportunity to incorporate their value judgment in making some decisions which can interfere with the global aim of achieving standard concepts. The other areas where there are glaring disparities are the fair values, financial liabilities, revenue recognition and consolidation together with equity.
Although conversion seems favorable there are more complexities that should not be overlooked. The major goal of global conversion is to create global standards to ease comparability. IFRS has comparability issues which are more serious than the US GAAP i.e. US GAAP has already proved that it’s more specific and its quality is higher. I would definitely recommend the US to keep its GAAP standards.
References
Hail, Luzi, Leuz, Christian and Wysocki, Peter D., (2009). Global Accounting
Convergence and the Potential Adoption of IFRS by the United States: An Analysis of
Economic and Policy Factors Available at SSRN: http://ssrn.com/abstract=1357331
Economist.com, “Closing the GAAP: America embraces international accounting
standards.”Economist.com. 28 Aug 2008. Economist.com, Web. 17 July 2009.
<http://www.economist.com/displaystory.cfm?story_id=12010009>.
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