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GAAP vs IFRS
In previous years, many countries developed their own accounting standards. With globalization occurring, the question of having one set of global standards arises. Since the 90s, there have been two main sets of accounting standards, Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS). Like many other countries, the United States is progressing towards IFRS. The most common question upon the transformation remains what are the advantages and disadvantages of switching to the IFRS and what is the difference between the two standards.
The acceptance of the transition from U.S. GAAP to IFRS is beginning to accelerate. According to the American Institute of Certified Public Accountants, the international standard-setting process began several decades ago as an effort to create standards that could be used by developing and smaller nations that are unable to establish their own accounting standards. Since businesses have become more global, the importance of having a common set of accounting standards is becoming crucial. A survey conducted by the International Federation of Accountants in 2007 proved that most accounting leaders around the world agree that it is important to have a single set of international standards for economic growth.
Converting to IFRS has both advantages and disadvantages according to the American Institute of Certified Public Accountants. With adopting IFRS, businesses are able to present financial statements on the same basis as foreign companies and competitors which results in easier comparisons. Another advantage is companies with subsidiaries in countries that require IFRS may be able to use one accounting language company-wide instead of different accounting languages in each company location. Also, companies can benefit by using IFRS if they wish to raise capital abroad.
On the other hand, adopting IFRS has some disadvantages including the thought that U.S. GAAP is the gold standard and by accepting IFRS a certain level of quality will be lost. Also, U.S. issuers without customers or operations outside the U.S. may resist IFRS, and ultimately companies may believe that the significant cost associated with adopting IFRS outweighs the benefits (www.ifrs.com). With cost as a concern of implementing IFRS, "audit firms have estimated that a GAAP to IFRS switch will cost between 0.5 percent and 1 percent of a company's annual revenue in addition to two to three years of hard work" (Johnson).
When considering switching from GAAP to IFRS, the difference between the two must be taken into consideration. According to the American Institute of Certified Public Accountants, "the extent of the specific differences between IFRS and U.S. GAAP are shrinking, although significant differences do remain." Some of the differences between the two are IFRS does not permit LIFO as an inventory costing method. LIFO stands for last in first out. This causes a complication for companies that use this type of costing method resulting in those companies having to switch to other methods (Manisha Articles). Also, IFRS allows the revaluation of assets in certain circumstances. International Financial Reporting Standards use a single step method for impairment write-downs rather than the two step method used in U.S. GAAP which will result making write-downs more likely.
Another difference is that IFRS requires capitalization of development costs when certain criteria are met. There is also a difference regarding when an expense should be recognized and the amount. Also, a difference arises when determining financial liabilities and equity. Things recognized as equity under U.S. GAAP will be seen as a dept under the IFRS. Although these are all significant differences between GAAP and IFRS, the greatest difference is that IFRS provides less overall detail and industry-specific guidelines (www.ifrs.com).
In conclusion, the International Financial Reporting Standards are becoming widely accepted. Many countries, including the United States, are converting or on the verge to converting from U.S. GAAP to IFRS. With this increasing acceptance, it is said that 2015 could possibly be the first year public companies would be able to convert their financials to IFRS (www.ifrs.com). This conversion is important because having one common set of accounting standards is a necessity especially in a time where globalization is occurring. Making the switch will result in both advantages and disadvantages. But having one language accounting standards is a key to economic growth.
References:
American Institute of Certified Public Accountants. "International Financial Reporting Standards." IFRS Resources. AICPA, 2010. Web. 18 June 2010. www.ifrs.com.
Johnson, Sarah. "SEC Pushes Back IFRS Roadmap." CFO. 4 Feb. 2009. Web. 17 June 2010. www.cfo.com/article.cfm/13056185.
Manisha Articles. "Difference Between GAAP and IFRS." DifferenceBetween.net. Difference Between. 2010. Web. 23 Sept. 2010. http://www.differencebetween.net/business/difference-between-gaap-and-ifrs/.
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1973 Cessna P337G LOT 2-444917