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July 4th, 2008 |

Author: Gavin

The United States’ Conversion from GAAP to IFRS

In a continually evolving world, companies are finding that through new and innovative technology doing business internationally is for the most part as feasible as doing business nationally. As a result, in the past 35 years the number of multinational companies has expanded from 7,000 to approximately 40,000, while half of US based businesses’ incomes are coming from outside of the country which is a 40% increase since 1950.[i] While global expansion allows for much economic opportunity, many found that lack of international consistency in financial records was an issue. In an attempt to create a mutually accepted set of accounting principles the International Accounting Standards committee released the International Financial Reporting Standards (IFRS) in 1997.[ii]

Since the Committee on Accounting Principals first published the United States Generally Accepted Accounting Principals (GAAP) in 1953, they have been the specific guidelines required by the Securities and Exchange Commission (SEC) to be used by all accountants.[iii] Although changes have been made throughout the years as different issues and problems were presented, this general set of guidelines has been a constant in the business world, especially for all accounting purposes. However, with the recent emphasis in global expansion in nearly every industry, companies are taking advantage of low costs and wages worldwide to realize increased profits. Therefore, companies need to be able to deliver their financial information in a way that is not specific to one country, which provided for the creation of the IFRS.

While some similarities may be found between GAAP and IFRS, there are a number of fairly significant differences. For example, GAAP is much more detailed as well as industry specific than the IFRS in regards to recognizing revenue. Included in GAAP are a number of different guidelines for specific industries, while IFRS is found to be a much more general and universal set of regulations concerning revenue. There are also major differences with respect to the reporting of expenses. An example of this would be how the IFRS requires stock prices to be reported in a much shorter period of time than was allotted by the GAAP. Differences between the two set of standards can also be found in the balance sheet of a company. Some things that may have previously been recorded as part of a company’s equity under GAAP must now be recorded as debt under IFRS. One last major difference is under IFRS companies are no longer allowed to use the “last in, first out” (LIFO) method of accounting when dealing with inventory management and related topics. Companies who have previously used this way under GAAP must now find an alternative way to report costs.[iv]

While international consistency would make global business much simpler, many US companies are resisting switching to IFRS because of the considerable amount of money and time associated with doing so. However, because international consistency is such a major goal of the SEC, they are requiring that all US companies use IFRS by 2014. Christopher Cox, chairman of the SEC, said the following in regards to advocating the switch to IFRS, “an international language of disclosure and transparency is a goal worth pursuing on behalf of investors who seek comparable financial information to make well-informed investment decisions.”[v]

While changing accounting standards may provide for a short term economic loss, the future economic benefits of doing so must be acknowledged. Companies doing business internationally under the GAAP are finding themselves putting considerable resources into interpreting different sets of standards in order to make investment decisions. These resources, including time, money, and employee research, are more valuable today than ever in America’s struggling economy and can be focused into more productive areas once all accounting standards are coherent. Understanding hundreds of different standards depending on where in the world one is doing business is just entirely too cumbersome and expensive.

While the benefits of worldwide coherency regarding financial reporting are vast, some fear the world may never achieve full compliance with IFRS. Although almost every country is in the process of or has already converted to IFRS, most countries have stated that they reserve the right to change or alter certain items within IFRS which are not in their best interest as a nation.[vi] This raises questions of future lack of consistency as companies change and alter these standards, which would diminish the foremost purpose of creating the IFRS.

In conclusion, the United States following an international set of accounting principles is in the foreseeable future. The European Union has already gone through a 3 year process of switching from 2002 to 2005, while China, India, Japan, and Canada are all scheduled to begin their switch in 2011.[vii] While the US hopes to complete converting to IFRS by 2014, it is inevitable that during the transition period in which US based companies switch from GAAP to IFRS some resistance may occur due to a learning curve. However, it is the opinion of many this is a necessary change due to the fact that business is no longer a national operation, but instead increasingly international. Consistency and comparability is the foundation and reason for accounting statements, and in a global economy the IFRS seems to be the only set of standards that will be proven valuable from this day forward.

[i] Bianchi, Alessandra. “Going Global – Jul. 13, 2007.” Business, Financial, Personal Finance News – CNNMoney.com. 13 July 2007. Web. 08 Dec. 2010. .

[ii] Hines, Todd. “International Financial Reporting Standards.” Journal of Business & Finance Librarianship 12.3 (2007): 3-26. Print.

[iii] Moussalli, Stephanie. “Accounting for the Journals First 100 Years: A Timeline From 1905 to 2005.” Journal of Accountancy. Web. 08 Dec. 2010. JournalsFirst100YearsATimelineFrom1905To2005.htm>.

[iv] Articles, Manisha. “Difference Between GAAP and IFRS | Difference Between | GAAP vs IFRS.” Difference Between Similar Terms and Objects. Web. 08 Dec. 2010. .

[v] The Maryland Association of CPAs. 2008. SEC offers roadmap to global accounting standards. Washington D.C. On-line. Available from Internet, http://www.macpa.org/content/printpreview.aspx, accessed 18 November 2008

[vi] “What Could Be the Disadvantages of Converting to IFRS?” Experts123 – Question and Answer Encyclopedia. Web. 08 Dec. 2010. .

[vii] Johnson, Sarah. “Could You Switch to IFRS in 3 Years? – CFO.com.” CFO.com – News and Insight for Financial Executives. 17 Dec. 2007. Web. 08 Dec. 2010. .

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