US GAAP vs IFRS
US GAAP vs IFRS
US GAAP vs IFRS
Developed by the Financial Accounting Standards Board, the United States Generally Accepted Accounting Principles has served as the framework for corporations for decades. It enables financial statements from virtually all corporations to be compared accurately and efficiently, and serves as a guideline for accountants. GAAP aids accountants in a vast amount of issues, from revenue recognition to inventory valuation, but with the rise of globalization and increased business overseas, accountants run into a serious problem.
Roughly one hundred and twenty nations currently use International Financial Reporting Standards as the structure of their accounting, not GAAP. This develops an issue for the users of GAAP, because their financial statements and practices do not follow the same format as these other countries. Many countries have recognized the need to convert to an international standard, such as Mexico, Japan, and Korea and plan to do so within the next couple of years. The Securities Exchange Commission has articulated the view that the United States should convert to IFRS, and has set tentative deadlines for when the transition will take place. In this article, the author will evaluate the key differences between IFRS and GAAP, and highlight the benefits and issues that could arise from the adoption of an international standard in accounting principles.
One issue that is differs between IFRS and GAAP is the means of inventory valuation. In this particular case, GAAP permits accountants to use Last-in First-out, First-in First-out, and weighted average. However, under IFRS, LIFO is not permitted. If United States corporations are forced to switch to LIFO under a universal accounting standard, they will incur sizeable increases in income tax. The use of LIFO allows them to avoid larger income taxes in times of inflation. This particular issue will be just one of the issues that arise from the proposed conversion to IFRS.
Another example of the different procedures between IFRS and GAAP lies in the evaluation of intangibles. GAAP focuses mostly on recording them at a set price, and amortizing that value over the amount of useful life of the intangible. IFRS stresses constant re-evaluation of the price, and recognition at the intangible's fair value.
Several smaller but still significant changes in principle exist between the two accounting standards. Under IFRS, when recording depreciation the company can choose to break the unit that is being depreciated into smaller segments. If there is a notable difference between the lives of all the components of the item, they can record depreciation on them differently. Normal assets are also able to be re-evaluated like intangibles, and are no longer purely recorded at historical cost. Furthermore, all subsidiary companies must copy all of the same procedures as its parent company. IFRS offers an increased emphasis on the comparability principle.
Although issues are bound to arise from the conversion to IFRS, there are numerous benefits. For one, extreme sums of money do not need to be spent hiring Certified Public Accountants to convert IFRS to GAAP or visa-versa. Everything will be in a uniform structure. It may seem as though this change favors only the large corporations, because of their increasing involvement overseas, but it also has numerous benefits for the smaller companies as well. For example, small corporations might begin looking overseas for new investment possibilities, especially in a struggling economy, and IFRS is necessary to provide potential investors with accurate, easily digested financials.
Perhaps one of the greatest benefits of adopting IFRS is the fact that the Securities Exchange Commission and the International Accounting Standards Board would be working together to develop the best, most effective accounting principles they can. Converting to an accounting standard that is less rule-based, and more principle oriented would definitely save American businesses a headache as well. Also, it is not anticipated that the SEC will mandate not-for-profit and private businesses to convert to IFRS, should the change become imminent. It would solely be for US publicly traded companies.
So where does the SEC stand now in terms of conversion to IFRS? Currently, they have released a proposed road map to highlight several milestones they wish to achieve to lead up to the switch. Generally, these milestones pertain to things such as education and training, funding, preliminary test use of IFRS, and ending with the mandatory ratification of IFRS to US corporations. The SEC has released several tentative dates for when they expect to convert, all in the current decade, but no date can be set in stone at this point in time. The SEC stresses convergence rather than adoption to IFRS, but time will tell which decision they will stand by. In conclusion, the shift to IFRS from GAAP will take time, money, training, and patience, but will be well worth it in the long run for United States and international businesses alike.
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