subject: US GAAP vs IFRS [print this page] US GAAP vs IFRS US GAAP vs IFRS
A tectonic shift in accounting rules from US GAAP to the international standard, IFRS, may be under way. The Securities and Exchange Commission has debated making it an option, or even mandatory, which could mean accountants across America might need to be re-educated. A single global standard is meant to simplify the world of accounting, but some fear that applying a foreign standard could be a solution more complicated than the problem.
In the United States, GAAP means generally accepted accounting principles. These are rules used to prepare, present, and report financial statements for a wide variety of entities. Some of these entities include publicly-traded or privately-held companies, non-profit organizations, and governments. Generally GAAP includes local applicable accounting framework, related accounting law, rules, and accounting standards. Internationally IFRS means International Financial Reporting Standards which are principles-based standards, interpretations, and the framework adopted by the International Accounting Standards Board (IASB) which was founded in 2001.
There are quite a few similarities between IFRS and US GAAP and the differences continue to rapidly become smaller and smaller which is owed to the convergence agenda of both these organizations. The differences explained below are just a few significant ones and as of this point of time. These may change due to developments in the convergence agenda of the IFRS and US GAAP. With respect to revenue recognition, US GAAP has developed a detailed guidance for different industries incorporating standards suggested by the other local accounting standard organizations in the US. On the other hand, IFRS mentions two main revenue standards along with a few interpretations related to revenue recognition as guidance. There are also some significant differences related to when an expense should be recognized and the amount that has to be recognized. For example, IFRS recognizes the expense of certain stock options with vesting over a period of time sooner than US GAAP. There are also some major differences between the US GAAP and IFRS with respect to the area of financial liabilities and equity. Instruments that were regarded as equity by the US GAAP will be considered as debt under the IFRS standards. This may cause some severe problems for accountants when trying to merge the two standards. And the last serious difference between IFRS and US GAAP is unlike US GAAP, IFRS forbids companies from using the LIFO or the last in, first out method of costing inventory. Companies using LIFO will have to transition to other costing methodologies (2009, Difference). This may be both costly and time consuming for those companies.
There are many similarities between GAAP and IFRS. One big similarity between the two relates to financial statement presentation. Both GAAP and IFRS require a balance sheet, income statement, and other comprehensive income for US GAAP or statement of recognized income or expense for IFRS, along with a statement of cash flows and notes to the financial statements. Also, both require that the financial statements be prepared on an accrual basis. Both US GAAP and IFRS have similar ways to measure how valuable a financial asset is.
However, efforts by both sides are not enough to completely change the process by which US GAAP or IFRS functions. Convergence efforts by themselves will not completely eliminate the differences between GAAP and IFRS. There are currently still differences in certain standards where the convergence has already taken place and unless the words of the standards are completely changed, interpretational differences will still exist. The success of a consistent set of global accounting standards also will depend on national regulators and industry group's willingness to refrain from giving their interpretations on IFRS principles, that ultimately will provide them with exceptions from the IFRS principles (2009, E&Y).
Despite the many setbacks in the process of converging the two methods, the Big Four, which consist of Deloitte and Touche, Ernst and Young, PricewaterhouseCoopers, and KPMG, are still very involved with the IFRS in the US. Many of these companies have tried to incorporate IFRS into the classroom. Deloitte and Touche recently devised a curriculum for Ohio State Universities Accounting Program. This course is said to prepare students for the eventual shift to IFRS. Soon after Deloitte's actions were announced, Ernst and Young started their own "Academic Resource Center" which is aimed to "develop curriculum and arm faculty members with time-critical learning materials focused on emerging global issues in accounting," with IFRS at the top of the agenda (2008, Harris). Other companies refer to the move to IFRS as a strategic opportunity to better themselves and their company.
Regardless of one's feelings of whether or not the convergence between US GAAP and IFRS is necessary, it is still happening all around us. With companies engaging in business globally, the convergence of IFRS with US GAAP should improve the financial statements for global investors. Due to the convergence, all businesses around the world will have the same set of standards to follow, which will clear up any confusion when it comes to comparing one company's books to another's. IFRS and US GAAP have the same basic underlying principles, which should make the convergence smoother, and allow for an easier transition for all companies, when it comes to adopting the new set of standards.
1. US GAAP vs. IFRS The Basics. Publication. Ernst & Young, 2009. Print.
2. Difference Between Similar Terms and Objects. 1 Oct. 2009. Web. 16 Nov. 2010. http://www.differencebetween.net/business/difference-between-gaap-and-ifrs/.
3. Harris, Roy. "Big Four Make Big Plans for IFRS - Buyer's Guides and Special Reports - IFRS vs. GAAP - CFO.com." CFO.com - News and Insight for Financial Executives. 22 May 2008. Web. 16 Nov. 2010. .
