subject: Reconciling GAAP Vs. IFRS [print this page] Reconciling GAAP VsReconciling GAAP Vs. IFRS
As accounting systems have developed over time, individual countries have adopted their own sets of rules to govern their accounting systems. Now, since the advent of companies "going global", businesses are expanding to customers from various countries and auditors and accountants are facing comparability issues when trying to convert one country's financial statement to another. Developing a new system with global applications is a key to resolving this problem. Once developed, a uniform system can better govern companies and economies of all sizes and normalize the way accounting information is reported. Accountants are in the best position to understand the similarities and differencesbetween Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). An expedient solution to finding a unified global system will require a full comparison of GAAP and IFRS characteristics-- the similarities and differences-- as well as the input and informed opinion of knowledgeable, expert accountants.
There are similarities between GAAP and IFRSthat should be preserved, such as the components of the financial statements that both standards share. These financial statements include the balance sheet, income statement, and the statement of cash flows. In addition, both require these statements, except the statement of cash flows, to be prepared on the accrual basis of accounting. Although related in these aspects, there are more differences than similarities between the two.
There are major differences between GAAP and IFRS that should be reconciled. Historically, the official principles that controlled the accounting profession were fairly unique from country to country. One major area of distinction needing to be reconciled is the application of rules versus principles. Two other areas of distinction worth mentioning are the reporting of extraordinary items and inventory. For example, GAAP permits the use of LIFO and extraordinary items while IFRS prohibits them; these differences in turn, result in differences in reported earnings per share between the two standards. As previously mentioned, the major difference between GAAP and IFRS is that the IFRS focuses more on the principles of accounting, rather than the rules of accounting. The IFRS's dependence on a principle-based system rather than a rules-based system increases the probability for different interpretations between the two. A key argument then between FASB and IASB is whether the ultimate standard will be based on rules or principles. Analysts for IASB (International Accounting Standards Board) suggest that the reason for so many frauds in the United States is from corporations following the "letter of the law", rather than the "spirit of the law." The proponents of FASB (Financial Accounting Standards Board) counteract by saying that accounting in the real world contains a prodigious amount of predicaments and exemptions, that a principle-based system would never be able to fully handle.
Accountants are the primary experts who examine financial statements and so their participation with the development of the new system is critical. How often has accounting been called the "language of business"? Mastering any language is predicated on understanding the root words and basic meanings.Developing a uniform system is most important to the everyday accountant since he/she is responsible to read financial statements and make the best possible recommendations. Although the work of establishing a new standard has been taken on by the large accounting boards, it is the job of every auditor and accountant to be primary players in the development of any system of rules, practices, principles, and the like. And to do that, they need to be part of the discussion of the merits of the previously mentioned similarities and differences between GAAP and IFRS.When a new global system finally emerges, they must be able to speak the language.
We are already on the right path toward that single standard as the IASB and FASB are constantly debating on how to congregate the two. In the United States, mutual efforts have been made between FASB and IASB to combine both standards into one, universal standard.FASB realizes that the recognition the IFRS has been receiving lately is warranted.And, given the U.S.'s dependence on global markets, it makes sense and benefits the FASB to adjust accordingly.Both GAAP and IFRShave merit. Principles are more open to interpretation than rules; however, a principle-based system has more intrinsic worth and merit than the current rules-based system instituted by FASB. In an effort to reconcile the two systems, some countries have gravitated toward adopting a single, international accounting system. And while several large countries, such as Australia, Japan and the United Kingdom, have chosen to use IFRS, there is yet no one established standard.
The FASB and IASB agree that a single set of standards would ease the complexity for auditors and accountants reviewing all financial statements and ultimately save time and money for businesses. Accountants and auditors are the ones who interpret financial statements, provide recommendations, and hugely impact business operations. Adopting a single system will make the task of financial reporting easier. And that's good for business.
