For many years now there has been a struggle to converge both the generally accepted accounting principles (GAAP) and international generally accepted accounting principles (IGAAP), which is also known as the international financial reporting standards (IFRS). For the most part they are very similar however do have a few key differences that need to be addressed. The mission to converge US GAAP with IFRS had begun in 1988 when the Security and exchange commission (SEC) first made a motion to establish worldwide accounting principles that were the same.
Generally accepted accounting principles were developed over the past 60 years and are so in depth there are over 2,000 documents to contain all for the information. GAAP consists of things such as the Financial Accounting Standards Board (FASB), the Accounting Principle's Board (APB), Accounting Standards Executive Committee (AcSEC), as well as many other accounting principles.
One major difference is the cash taxes, which could seriously effect international business and seriously effect the way some companies do business. IFRS does not permit one to use last in first out method to cost inventory and would have to cost items at actual cost. This could hurt many small companies when tax season comes around. This is switching over but it will be a several year process. As it is stated that the earliest the SEC would even allow public companies to converge would be 2015. Currently there are more then 100 countries that are required to use the IFRS.
Another major difference which effect company value is the measurement of long-term assets. IFRS allows you to measure assets at fair value instead of book value. This goes for assets such as property, plant, and equipment. This would allow a company to either raise or lower values however it deems fit. It could also alter debt to equity as a company could over value assets so that it seems as if it is a more valuable company. It could give many companies too much freedom if they are not honest.
International Financial Reporting Standards also allows a single step write-down method, which differs from the two-step method currently accepted by the US Generally Accepted Accounting Principles. It would make it easier for a company to write off items a lot more often then usual. This would lower the taxes paid by a company due to the fact that a lot more would be written off.
One major problem with conversion would be the education process. All current accountants would need further education in the new method that would be required by the IFRS. The CPA exam would also need to be re-designed to include new sections and alter some of the current ones that exist. All the work required for the change it as well as the work required to re-educate is one of the big factors preventing it all to change.
The convergence process had begun back in 2001 when the International Accounting Standards Board (IASB) was created to help with the process. Next in 2002 the IASB created an agreement to develop an accounting process that would create standards that would work for both in country finance reporting as well as international. In 2005 the SEC announced that foreign companies could report finances using the IFRS instead of US GAAP. In 2008 the SEC created a roadmap that would explain how and when the IFRS would become implemented into the US financial reporting system. Then in 2009 the IASB finishes its set up of a roadmap and finds out what amendments need to be made to the current US GAAP to make it to the IFRS. By 2012, Mexico, Canada, India, and Japan should be converted to IFRS with us joining in 2015.
The Convergence to the IFRS is a long slated process however it has come a long way since 2002 when the process first started. There are a few key differences explained above that are being worked out by the IASB and the ways to fix it have been determined. When it is finally completed it will make accounting worldwide and international companies much easier to do business.
Citations:
Kieso, Donald E., Jerry J. Weygandt, and Terry D. Warfield. Intermediate Accounting. Hoboken, NJ: Wiley, 2010. Print.
