Company financial statements are reported to the public, so investors can make informed investment decisions. To ease the evaluation process for investors companies in the United States follow GAAP standards. General Accepted Accounting Principles serve the purpose of setting a level of consistency for financial statements, no matter the company. The business world is no longer focused on separate countries. Globalization is a major change occurring where business is now focused on the global economy. This shift has caused the United States and other countries to begin the process of implementing IFRS polices. International Financial Reporting Standards will be the global standards; the United States will no longer differ from other countries. GAAP and IFRS policies both serve the same purpose of ensuring consistency in financial statements. The two policies do have differences that are important for potential investors to be aware of.
One of the main differences of GAAP and IFRS is that GAAP is a rule based while IFRS is principle based. The principle base that IFRS applies allows for different interpretations for the same transactions. When accountants are able to imply different interpretations to similar transactions it is important for enough disclosure to be in the financial statements. Rule based accounting that is incorporated into GAAP requires accountants to follow a set of rules while preparing financial statements. A set of rules helps to avoid errors in judgment but can cause the preparation of financial statements to be more complex.
The differences of the two standards continue with consolidation, statements of income, inventory, and development costs. GAAP standards allow for two different methods for accounting of inventory. Accountants can use LIFO and FIFO. Last in first out method uses the most recent inventory to account for the first units sold. Fist in first out is the second method and is supported by both GAAP and IFRS. FIFO takes the inventory first purchased and applies the inventory to the first units sold. The statement of income is another change that accounts will face. Under GAAP standards companies are allowed to state extraordinary items segregated and below net income. Extraordinary entries include items and events that are not a normal occurrence for the business. The events can be said to be unnatural and infrequent. The IFRS will not allow for extraordinary items to be accounted for below net income, but incorporated with the rest of the income statement. A third difference of development costs arises when under IFRS companies are not able to capitalize these costs if the requirements are met. GAAP mandates that development cost be accounted for under expenses. Consolidation differs under two models. IFRS supports the control model instead of the risk- and-reward model that is the standard for GAAP. IFRS and GAAP have some differences but it is the belief that setting international accounting standards will better serve a global economy.
Implementation of IFRS is a long timeline that has increasingly gained traction in the United States. The Securities and Exchange Commission will play a vital role in the acceptance of the IFRS policies. According to ifrs.com the first sign of accepting international accounting standards began when the SEC issued a statement saying it would support international standards in 1988. In the year 2007 the SEC unanimously voted to accept IFRS from foreign investors. The mission continued in 2008 when the SEC provided a timeline and advice for moving IFRS into American companies, pushing for an earlier adoption. The backing of the SEC has helped to speed the implementation of IFRS but it is still a few years off into the future. IFRS.com believes that the earliest the SEC would allow companies to transfer their accounting standards over to IFRS would be 2015. With the possibility of IFRS only being 3 years away for United State companies it is important to be prepared.
The SEC is concerned with the accuracy of company financial statements so investors are able to make informed decisions on whether to invest in a company. No matter the policy in place, the consistency in which financial statements are prepared is very important. GAAP standards have provided a great service to investors in the United States, but lacks international power. IFRS will help to provide consistency of financial statements for companies not only in America but also for the global economy. With many investors now able to invest in international companies having one set of standards will ease confusion among investors. The main point to remember is that the public deserves the truth about companies' financial strength and it is important to continually improve standards.
Work Citied
"International Financial Reporting Standard." International Financial Reporting Standard. American Institute of CPAs. Web. 12 Apr. 2011. .
