subject: The Pending Transition from GAAP to IFRS [print this page] The Pending Transition from GAAP to IFRS The Pending Transition from GAAP to IFRS
Many professional CPA researchers believe GAAP (Generally Accepted Accounting Principles) will eventually be replaced by IFRS (International Financial Reporting Standards). More than 100 countries currently have adopted IFRS opposed to using GAAP, therefore among other reasons, pressure is on the SEC (Securities Exchange Commission), FASB (Financial Accounting Standards Board), and IASB (International Accounting Standards Board) in regards to making a decision to allow use of IFRS for American companies. My paper will explain the major impacts, including the pros and cons of the SEC allowing use of IFRS among American companies as well as how it will affect the way accountants report financial information.
So how different is US GAAP from IFRS? For starters, IFRS is principle-based whereas GAAP is rules-based. In other words, IFRS follows a framework that allows for different interpretations for the same transaction. As for the technical financial reporting, there are an overwhelming amount of differences. For example, under GAAP, inventory can be reported following either the LIFO method (Last In, First Out) as well as the FIFO method (First In, First Out). Under IFRS, LIFO is prohibited from being used. Furthermore, on a typical income statement, extraordinary items are reported segregated under IFRS; under GAAP, they are reported below net income (loss). Earnings-per-share would normally be computed by averaging individual period incrementing shares under GAAP, whereas under IFRS they are not. This is just the tip of the iceberg when it comes to the variety of differences between the two sets of accounting principles.
The debate whether the United States should switch to a global standard set of accounting principles is being argued from all directions. In Bruce Pounder's article, he states that the adoption of IFRS in the US promotes many advantages that would save CFOs a significant amount of money as well as maintain the quality of financial reporting principles. The FASB and the IASB have been working on a convergence project to create a global-based set of accounting principles. Pounder assures that the project is being done with high regard in maintaining quality rather than developing principles for the sake of sameness. Another advantage to adopting IFRS is that American companies will also be able to cut down on costs of operating expenditures such as the costs associated with preparing financial reports. In contrast to these pros, there are also some major downsides. The deadline to train American auditors and accountants by a 2014 deadline seems very unrealistic to many. In addition, the SEC would be forced to give up its regulatory abilities to a global regulator. More questions remain as to what will become of the content on CPA exams as well as college students who are currently pursuing Accounting degrees.
The main question that is imprinted on the minds of many, is the issue of how exactly will a new set of accounting principles be implemented? On June 16, 2008, the FASB and the Financial Accounting Foundation hosted a joint meeting for discussing the idea of developing a blueprint for transitioning from GAAP to a more improved version of IFRS. If the green light is given by the SEC, FASB chairman stated that a potential blueprint could make for a much easier and less costly transition for everyone. The process of developing a blueprint for a potential transition would have to resolve many issues and answer difficult questions before the idea can become a worldwide reality. Among the obstacles standing in the way that need to be addressed concern how the CPA exam will be altered, the way college education will adapt, as well as how current CPAs will receive training for a change that might seem intimidating for many to accept.
While switching from GAAP to IFRS or a new set of accounting standards and principles may simplify international business and solve a complex problem with global companies, there are also downsides as well as other advantages. With the SEC, FASB, and IASB all pursuing a global system of financial reporting, it seems that the question of if it will occur no longer exists, but more of when. Many accountants, auditors, and CFOs suggest that companies construct a new plan to prepare for the transition, which may include educating and training employees, as well as reformatting IT systems. There are opinions all across the spectrum agreeing and rejecting the decision to eventually transition to a global system of financial reporting, which, at this point, may already be in progress of adoption by the United States.
References:
Leone, Marie. The Beginning of the End of GAAP. 2 May 2008. CFO.com. 23 Sep. 2010 .
Leone, Marie. "IFRS Returns to the Front Burner." CFO.com. US:CFO.com, 2010. LexisNexus.com. 10 Nov. 2010
Forgeas, Remi. Is IFRS That Different From U.S. GAAP? 15 Dec. 2008. cpa2biz.com. 22 Sep. 2010 .
Pounder, Bruce. "IFRS: More Opportunities Than Threats." CFO.com. US: CFO.com, 2010. LexisNexis.com. 23 Sep. 2010 .
