GAAP vs IFRS

GAAP vs IFRS

GAAP vs IFRS

Today we live in a world in which business and trade are crossing oceans and continents. We can now conduct business with companies all over the world without having to leave the office. Globalization of businesses has greatly expanded the grasp of capabilities companies can now work within. However, within this new sphere of activity we now face some major business related issues. One of the biggest issues facing business and the accounting world today is the issue of standards and the difference in standards among trading countries. In the United States, accountants follow the standard known as Generally Accepted Accounting principals (GAAP). Other countries follow their own standards as well. Many accountants hope that all companies around the world including the US switch over to the International Financial Reporting Standards (IFRS). There are many differences among the alternatives but in the end harmonizing all standards around the world would make business run smoothly and beneficial to all.

It is key that financial reporting includes many items. There are three key players in the making of the US standards of GAAP. First there is the Securities and Exchange Commission (SEC), which was established by the government. Their main goal is to develop and standardize financial information presented to stockholders (Kieso, Weygandt, Warfield 7). At the time of the creation of the SEC there had been no prior group issuing standards. The SEC does not work alone; it looks toward the Financial Accounting Standards Board and American Institute of Certified Public Accountants (AICPA) as well. GAAP has been along way in the making as it includes countless of documents that have been being developed for decades (Kieso, Weygandt, Warfield 13). Although adopted and used by companies in the United Sates it is not without its own problems. Some believe that GAAP was developed in such a way that those who created it would benefit most from its rules. While GAAP is widely used with in the United States it is certainly not the case beyond its borders.

The International Accounting Standards Board (IASB) formulated the International Financial Reporting Standards (IFRS), which is prepping to become the global standards in financial reporting. Worldwide there are approximately 120 nations following these standards according to the website IFRS.com. Many countries are supposed to jump on the bandwagon in the next couple of years. Some countries like Canada and Korea aim to switch over to IFRS no later than next year. The IFRS website claims the SEC has made reports that it will require all publicly traded US companies to switch over to IFRS by the year 2015. There are still some companies voluntarily switching over especially those who have times overseas. The change over has been slow due to the major differences found between GAAP and IFRS.

There are many key distinctions in all aspects of financial reporting using one standard over the other as stated in a report issued by the company Ernst and Young. A key statement in financial reporting is the income statement, and this is certainly a place where differences among the standards can be found. GAAP will report expenses bases on function while IFRS reports expenses by nature. Also GAAP includes extraordinary items on their income statement while doing so in IFRS is prohibited. Other places variation may be found are within inventory reporting. GAAP reports inventory using the LIFO (Last in first out) method while IFRS again prohibits such reporting. Differences can also be found in reporting on intangible assets to the way foreign currency maters are handled. With disparity between the two standards some may wonder why switching over to IFRS or any one single standard will be more advantageous.

The chairman of IASB David Tweedie states, " The move to global accounting standards is a key element of the global financial reform agenda and long term benefits of a single set of high-quality accounting standards far outweigh the short-time difficulties of transition." With globalization in full effect in makes the most sense to standardize business reporting's. The International Financial Reporting standards website lists a clear advantage of companies worldwide switching over to this standard. It is advantageous of all companies because they will be presenting financial states that are done on the same basis as their competitors. It will make comparing books and running business transaction a lot easier. Once the United States finally conforms and the SEC adopts IFRS all companies in the US will have to switch over. Once this happens any countries that have yet to do the same with most likely follow suit making IFRS truly an international standard. Although a seemingly daunting task the end results with be worth the pain.

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