U.S. Generally Accepted Accounting Principles vs. International Financial Reporting Standards

U.S. Generally Accepted Accounting Principles vs. International Financial Reporting Standards

Iggy Schmitt 11.17.2010

ACC 303

West Chester University

U.S. Generally Accepted Accounting Principles vs. International Financial Reporting Standards

GAAP is the Generally Accepted Accounting Principles or the common set of standards and procedures that companies use to compile their financial statements in the United States of America. IFRS is the International Financial Reporting Standards, or a set of international accounting standards stating how particular types of transactions should be reported in financial statements. In the following paragraphs the two standards will be described, along with a look into the differences between them.

Firstly, the American Institute of Certified Public Accountants (AICPA) designated the Federal Accounting Standards Advisory Board (FASAB) as the body that establishes generally accepted accounting principles (GAAP) for federal reporting entities. GAAP includes principles categorized as: official principles of FASAB Statements and Interpretations, FASAB Technical Bulletins, and Technical Releases. GAAP is not a single accounting rule; it is rather a collection of many rules on how to account for various transactions. Most American corporations use GAAP rules while reporting their business transactions. This provides consistency in companies and businesses reporting so the financial analysis, like Banks and the Securities and Exchange Commission (SEC), can have reporting companies prepare their financial statements using the same rules and procedures. Currently there is over 150 "pronouncements" as to how to account for different situations and transactions under GAAP. An example of a couple of these situations could include: how to report income from the sale of goods, or accounting for incentive stock option distribution.

Changes in GAAP rules can affect American businesses dramatically. For example, the effect on a bank's net worth changed drastically after the FASAB stop requiring banks to mark their assets to the lower of cost or market. Nonetheless, the rules of GAAP reporting provide a great deal of information to users of financial information. Accounting is essentially the study of rules and how they apply to business transactions, so in the sense GAAP is quite useful.

However in recent times, GAAP has been slowly fading away in favor of International Accounting Standards. The International Accounting Standards (IAS) is also a set of standards stating how particular types of transactions should be reflected in financial statements. International Accounting Standards were issued by the International Accounting Standards Board (IASB). It should be noted that, the International Accounting Standards Committee (IASC) has no authority to require compliance with its accounting standards. Yet, many countries require the financial statements of publicly-traded companies to comply with IAS. The IASB consists of 15 Board members; each person has one vote for creating and implementing new standards. These people are selected as a group of experts with experience in standard-setting, using and preparing accounts, etc. In comparison to U.S. GAAP, IAS and IFRS are very useful to users of financial statements. IAS also provides extremely useful real life situations that help guide accountants and other people in the business world. Having said this, U.S. GAAP and IFRS are different in numerous ways.

Again, GAAP and IFRS conflict each other on various topics in accounting. IFRS differs from GAAP on subjects such as: fair value, cash receivables and prepaid expenses, inventory, short-term investments, revenue recognition, long-term liabilities, income taxes, etc. To be more specific, one can compare the way inventory is treated under U.S. GAAP vs. IFRS. For instance, under GAAP inventory can be presented at a lower of cost or market required, whereas IFRS states it should be presented at lower of cost or net realizable value. Continuing, under GAAP acceptable costing methods for inventory include: FIFO, average cost, and LIFO. However under IFRS, LIFO is banned as a use of a costing method of inventory. The inventory example is just one of many differences between the two standards.

As mentioned earlier, the current consensus seems to be that U.S. GAAP will soon be pushed aside, and the IAS will take over as the one universal accounting principles board for every nation. But this process is much more complex than it seems. Whichever path is taken, a few big issues will have to be settled between FASB and IASB before U.S. companies adopt the global standards. They include defining liabilities and equity, reworking financial-statement presentations, and revamping lease accounting and revenue-recognition rules. The SEC has committed to moving U.S. companies to IFRS as well. Reports like these make the switch to IFRS seem inevitable.

Yet, there are problems caused by the differences between GAAP and IFRS. These problems include the fact that current accountants and accounting students will have to learn a new system of principles and standards. Additionally,IFRS allows for more professional judgment on the part of company management and accountants, while U.S. GAAP shields both groups with rules and implementation guidance. The customs of using extensive professional judgment when applying accounting rules varies from country to country, but is rare in the United States. This difference is problematic for small U.S. companies. The more practical reason small businesses aren't ready to switch, is simply because they are not up to speed on IFRS. Many issues will have to be discussed between the two parties before anything can be finalized, but this remains to be seen.

In conclusion, it is known that GAAP and IFRS are helpful to the people who follow these standards. It is also known that in recent times, GAAP will most likely soon combine with IFRS, which has its positives, but will also cause a lengthy process full of conflicts. For now, accountants and other business people must continue to follow their respective standards until further notice.

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