As the world becomes more and more interdependent because of technology and our global economies, needs for uniformity begin to arise in many different areas. One of these areas where the world feels a need for uniformity is in accounting standards for our global companies. In this paper I will discuss a fewsimilarities and differences between the US GAAP and IFRS. Also, I will explain why it is important to our nation's development in the global environment to adapt IFRS even though our nation has the largest economy in the world.
Globalization is an idea whose time has come. Our world is increasingly becoming a unified world and the only thing we can do is take advantage of the many opportunities that will come from it while overcoming the challenges that will also come from globalization. We will benefit more by embracing this change and becoming leaders and advocates of this new world than by resisting it. Our country has always been a leader and taking the lead on this issue will give us a competitive edge that will allow us to seize more potential opportunities as they arise in this global economy.
International Financial Reporting Standards (IFRS) started in the spring of 2001, prior to this we had the International Accounting Standards (IAS). The European community were amongst the first to formally adapt IFRS as their official accounting method by 2005. Having an official international accounting standard will aid better allocation of global economic resources, which will in turn enhance the world's economic performance. Acceptance of the IFRS as the one world standard remains a work in progress. Although the Generally Accepted Accounting Principles (GAAP) is still widely used, the US SEC and the European Union International Market Commission issued a joint memorandum of understanding that set IFRS as the system to be the official accounting method for international companies eventually.
IFRS is designed to be more principles based and it is only logical to doubt changing over from GAAP which has passed the test of time being in existence over 70 years. However, it is important to show the world that we are willing to change if it is something that will benefit the world not just our country. Keeping two systems is simply inefficient. The two methods have their weaknesses and strengths, but there are discrepancies between the both. For example in 2001 Novartis the Swiss pharmaceutical company reported under the International Accounting Standards (IAS) and US standards. Earnings under the IAS were reported as 4.1 billion, whereas under the US GAAP they were 2.8 billion.
From the discrepancy of earnings showed between these two accounting methods in the Novartis example, it is obvious that there must be a number of differences between the two methods. IFRS formerly allowed companies to segregate in their income statement any items not expected to reoccur and designate them as extraordinary gains or losses, but as you might expect this led to abuses.
Another difference is in how the two systems define expenses. In IFRS it is defined as decreases in economic benefit during the accounting period in the form of outflows, or the depletion of assets, or incurring liabilities that result in decreases in equity other than those relating to distributions to equity participants. The term expenses is used in IFRS broad enough to include losses as well as normal categories of expenses; in this IFRS differs from the US GAAP that treats losses as a separate and distinct element to be accounted for. IFRS allow expenses to be classified according to function or by nature, whichever provides more reliable and relevant information, whereas, under GAAP expenses are classified by function only. Traditionally gains and losses are thought by accountants to arise from purchases and sales outside the regular business trading of the company such as disposal of noncurrent assets that are no longer required. IFRS however, does not offer a definition for gains and losses that allows them to be separated from income and expenses. Another difference in terminology comes with the term net assets. For IFRS, it is total assets total liabilities, while in GAAP it is the same as owner's equity.
Not everything is completely different there are also many similarities under the two accounting methods. One example is that as a general principle, the offsetting of assets and liabilities is not permitted under either accounting method. Also until recently IFRS and GAAP allowed an entity to report any items of income or expenses as abnormal expenses item in either the statement of income or the statement of comprehensive income. IFRS has recently discontinued this practice.
As the world changes so will the different standards and way of doing things. Both methods need constant readjustment to better represent the most reliable information for investors as we are entering this world of global economies. With all this in mind, it only makes sense for us to support an international accounting system that will help our global companies and our financial institutions run more efficiently and protect the private investors.
References
Don E. Garner, David L. Mckee, and Yosra AbuAmara Mckee. Accounting and the Global Economy After Sarbanes-Oxley. Armonk, New York: M. E. Sharpe, Inc., 2008
Mary E. Barth. Research, Standard Setting, and Global Financial Reporting. Hanover, MA: Now Publishers Inc., 2007
Barry J. Epstein, Eva K. Jermakowicz. Wiley 2010 Interpretation and Application of International Financial Reporting Standards. John Wiley & Sons, Inc., 2010
