Should U.S. Switch From GAAP to IFRS?

Should U.S

Should U.S. Switch From GAAP to IFRS?

As of know the United States uses general accepted accounting principles; also know as GAAP, which is required by the SEC. But many people in our country feel that it is time to change and to keep up with the rest of the world. Over 110 countries worldwide are using International Financial Reporting Standards, or better known as the IFRS. There are many differences between the two, some feel that GAAP is better and others feel that IFRS is better. The both bring in similar but yet very different outcomes to financial statements. Why might it be important to know the difference between the two? Because the U.S. will most likely be switching to IFRS, and there are thousands of US publicly traded companies using GAAP, while there are ten of thousands outside the US using IFRS. Many countries have switched over to IFRS and it might be time for the US.

One example of differences would be that GAAP uses LIFO (last in- first out) and IFRS does not. GAAP also uses FIFO but by using LIFO a company can report their inventory that potentially can save them by reducing taxes. Using LIFO a company will sell their more recent inventory leaving their previous inventory valued at below the current market rate, and leaving the remaining inventory on the books. So the cost of goods sold for new inventory will increase and the remaining inventory on the books remains low. Some feel that this is manipulating the system by the way it appears on the financial statements. Since IFRS cannot use the LIFO method companies are better off because they don't get to manipulate the system in terms of gross margins. Also the IFRS makes it a lot harder for managers to increase revenue and to wipe away bad debt. There are obviously many differences to talk about but this one might be the most interesting.

The US in current debate whether is should switch from GAAP to IFRS. In the past few years there have been multiple countries joining the Europeans in the IFRS. Within the past years few years Australia and Chile have both switched to IFRS. And are very own neighbors the Canadians have actually switched from their Canadian GAAP to IFRS, which became in effect on January 1, 2011. As well as Japan and India will also begin using the IFRS this year. Mexico is expected to start using IFRS in 2012. Canada feels that the IFRS just makes more sense to them. They say that it gives you more choices on how they report information instead of being locked into the Canadian accounting principle. GAAP has a lot of restrictions and practically tells the company when and how to report revenue on goods or services.

Some feel that having to switch over to IFRS would only complicate things for companies, as it could take several years to learn and to produce the proper ways of the IFRS. But by taking in the IFRS could only benefit us when it comes to global comparisons. The U.S. will be able to compare cross-border mergers and acquisitions with non-U.S. companies. According to a survey conducted by KPMG and Financial Executives International, 88% of executives responsible for corporate financial reporting feel that IFRS would indeed enhance global comparability. Also some benefits of IFRS would be lower cost of capital, easier consolidation, and understanding the financial statements of overseas suppliers, customers, and subsidiaries.

The United States is projected to adapt the IFRS sometime between 2012 and 2014. But still many companies are going to hold off on changing or getting to know the IFRS better until it is official from the SEC that the U.S. is switching over. A short-term impact on the U.S. would be new rules and perspectives on financial reporting, but also may be confusing. Some long-term impacts would be that accountants know a single set of global structures. The U.S. will likely wait to see how the Canadians do with the adoption of the IFRS after their first year is through. Canadian experience will only help us to familiarize and see the major differences, if any, to switching over to the IFRS. If a lot of managers are using GAAP and manipulating the system and over 100 countries worldwide are using IFRS, there is no reason why the U.S. should not switch over soon to help prevent companies from hiding stuff and to get a better understanding of non-U.S. companies financials.

References:

1.Castaldo, Joe. "Accounting For Trouble?"Canadian Business 84.1/2 (2011): 15-16. Print.

2. Cole, Marine. "Make or Break? Long-Delayed IFRS to Get More Exposure in '11."News.idg.no. 02 Feb. 2011. Web. .

3. Wolinsky, Jacob. "GAAP Versus IFRS -- GuruFocus.com."GuruFocus - Stock Picks, Portfolios of Warren Buffett Guru Investors. 21 Feb. 2011. Web. .

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