The Move From GAAP to IFRS

The Move From GAAP to IFRS

The Move From GAAP to IFRS

In 1973, the Financial Accounting Standards Board (FASB) was appointed by the Securities and Exchange Commission (SEC) as the governing body to oversee accounting standards in the United States. The set of rules and standards that has been established by the FASB is known as Generally Accepted Accounting Principles (GAAP), and U.S. companies are required to follow GAAP procedures in their financial reporting. U.S. GAAP is used only in the United States, and this non-conformity has proven to be less efficient as time goes on.

The international equivalent to FASB in the United States is the International Accounting Standards Board (IASB). The IASB has put forth a set of accounting standards known as the International Financial Reporting Standards (IFRS). IFRS is the most widely adopted set of accounting standards throughout the world, and these standards are used in most major countries. This uniform set of accounting principles allows companies that operate in multiple countries to adhere to only one set of accounting rules and prepare only one set of financial statements.

Recently, the FASB and the IASB have been working closely to develop a uniform set of accounting standards that the United States would adopt. This new IFRS would probably include characteristics of the current GAAP and the current IFRS. The continued globalization of business is a major driving factor in the push for the switch from GAAP to IFRS. Creating a standard set of rules would greatly increase the ease with which international companies could report in the U.S., as well as other countries throughout the world.

Making this move from GAAP to IFRS, however, has proven to be more difficult of a task than one might think. Although both sets of standards have most of the same basic underlying principles, the rules with regard to those principles are somewhat different. The main difference is that GAAP has many very specific rules that are set in place that are designed specifically for the U.S., whereas IFRS has more general rules that are intended to serve a broader spectrum of countries.

As with any impending major change, controversy ensues over whether or not the change is indeed necessary or even helpful for that matter. Experts have taken stances on both sides of the issue, and they have provided reasons as to why the U.S. should continue this convergence process, as well as why the U.S. should be content with the GAAP that are currently being employed.

The first and foremost advantage of conforming to a more universally accepted set of standards was already mentioned the ease with which companies can prepare financial reporting in different countries. A universally accepted standard allows companies to prepare just one set of financial statements rather than a whole slue of them in order to adhere to each country's financial reporting rules. Not only do standard rules make the companies' jobs easier, but they also make the financial statements more user-friendly for stakeholders who may want to view financial statements for several different countries that a company does business in. Also, public users of the financial statements can better make comparisons between companies if all the financial statements are uniform.

Those who oppose the idea of switching from GAAP to IFRS make the argument that not only would switching from GAAP to IFRS be very expensive, but such a change really won't make financial statements as comparable as people would like to believe. Even within the current IFRS, the reporting standards are implemented slightly differently within different countries. Some say that the heavy dependence on difficult international enforcement makes for an already less than seamless transition between the financial reports of the countries that have already adopted IFRS.

Others believe that the current GAAP are superior to the current IFRS, so why would the U.S. change to an inferior system all for the sake of seeking a uniformity that might not be possible to achieve? Why shouldn't the rest of the world change from IFRS to U.S. GAAP instead of vice-versa? Proponents of GAAP point out that the rules put forth in GAAP help protect against lawsuits since the language of the rules is clearly spelled out. IFRS on the other hand has more general rules, so it can often be less clear as to who is really at fault when a problem arises; this leads to more lawsuits as a result.

Both sides of the issue present valid arguments. Proponents of the convergence effort believe that it is necessary to establish universal reporting standards. Opponents believe that such a move would unnecessarily compromise the superior quality of GAAP for the convenience of IFRS. Although the cons of convergence might be at least as legitimate as the pros, it looks as if the switch from GAAP to IFRS will take place because of the practicality of everyone playing by the same rules.

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