Will the United States ever switch to the Metric System? Will there ever be a global currency? Will GAAP ever be trumped by IFRS? These are all valid questions when speaking about the globalization of the United States at large. It seems as though the United States holds dear its standard methods of measurement. When making a calculation, whether it is units of measurement or financial reporting, one must often convert a measurement or consider an international adaptation of given data to arrive at the respective equivalent. When discussing the financial aspect of globalization, it is hard to avoid the two major methods of financial reporting. GAAP (Generally Accepted Accounting Principles) are the guidelines for financial reporting in the United States. On the other hand, IFRS (International Financial Reporting Standards) are a set of guidelines that regulate how transactions and other events are reported in international financial statements. Despite a lot of aspects that make the two similar, there are subtle differences that virtually set them a world apart.
One of the main differences between GAAP and IFRS is how each one recognizes intangible assets. Intangible assets include advertising costs, research and development costs, copyrights, etc. GAAP takes a very simplistic approach and values these assets at fair market value. IFRS takes a more descriptive approach and only recognizes such an asset if it has a dependable and future benefit to the firm.
Another difference between GAAP and IFRS is how handles inventory. Under GAAP either LIFO (Last-In-First-Out) or FIFO (First-In-Last-Out) can be used to measure inventory costs. Under IFRS, the LIFO method does not exist and cannot be used. As a result of GAAP's use of LIFO, accountants and analysts have to take different approaches when comparing inventory data. An example of this is if a company uses LIFO to measure inventory and an analyst needs to convert the calculation to FIFO for accurate comparison analysis. This is an extra step that would be eliminated if there was a standard for measuring inventory.
Some similarities exist between GAAP and IFRS as well. Each set of standards requires a full report including a balance sheet, income statement, etc. Just as in GAAP, IFRS requires these statements to be prepared on an accrual basis. This means that the statements must reflect revenues and expenses of the same period in which they were incurred by the firm. Neither set of standards require these statements to be prepared for external use in the interim.
There are definitely some pros and cons to both GAAP and IFRS that bring question to which set of standards would be beneficial. One of the good things about the continuation of GAAP is that accountants and analysts are used to it. This makes it easy to work with the reports because it is what everyone is used to. Unfortunately, one of the bad things about GAAP is that it is rule-based. This allows an accountant to open the rules for interpretation and use them to provide misleading data. Many firms have illegally manipulated the rules of GAAP to establish rapport with new clients rather than to benefit investors. Needless to say, GAAP does not exactly paint the most accurate picture of a company's performance when compared to IFRS.Â
The good thing about IFRS is that it is more principal-based. This means that it is more concerned with painting a clear picture of company performance, sustainability, and stability especially when being directly compared to another company. This is better for investors, employees, clients, and anyone else with a vested interest in the firm. It also helps to keep the firm honest and transparent so that they are less tempted to use illegal methods of accountancy.
One of the few down sides to IFRS is that it is not what the US is used to using. The changes, although most are subtle, would create an impact on the way companies are taxed and retain revenues. The scale of impact on the economy is one that is open for interpretation.
Although FASB (Financial Accounting Standards Board) has not set goals to make the major switch to IFRS yet, there are signs of GAAP coming closer to a convergence. With well over 100 countries adopting the alternate set of standards, it may not be long before the US does the same. Dates have been set to address a possible change with regards to how FASB could change GAAP. With a large percentage of US companies having operations in other countries around the world, many have used IFRS along with GAAP for internal use. It is only a matter of time before firms will be required to adapt methods of the IFRS for external use.
One of the main differences between GAAP and IFRS is how each one recognizes intangible assets. Intangible assets include advertising costs, research and development costs, copyrights, etc. GAAP takes a very simplistic approach and values these assets at fair market value. IFRS takes a more descriptive approach and only recognizes such an asset if it has a dependable and future benefit to the firm.
Another difference between GAAP and IFRS is how handles inventory. Under GAAP either LIFO (Last-In-First-Out) or FIFO (First-In-Last-Out) can be used to measure inventory costs. Under IFRS, the LIFO method does not exist and cannot be used. As a result of GAAP's use of LIFO, accountants and analysts have to take different approaches when comparing inventory data. An example of this is if a company uses LIFO to measure inventory and an analyst needs to convert the calculation to FIFO for accurate comparison analysis. This is an extra step that would be eliminated if there was a standard for measuring inventory.
Some similarities exist between GAAP and IFRS as well. Each set of standards requires a full report including a balance sheet, income statement, etc. Just as in GAAP, IFRS requires these statements to be prepared on an accrual basis. This means that the statements must reflect revenues and expenses of the same period in which they were incurred by the firm. Neither set of standards require these statements to be prepared for external use in the interim.
There are definitely some pros and cons to both GAAP and IFRS that bring question to which set of standards would be beneficial. One of the good things about the continuation of GAAP is that accountants and analysts are used to it. This makes it easy to work with the reports because it is what everyone is used to. Unfortunately, one of the bad things about GAAP is that it is rule-based. This allows an accountant to open the rules for interpretation and use them to provide misleading data. Many firms have illegally manipulated the rules of GAAP to establish rapport with new clients rather than to benefit investors. Needless to say, GAAP does not exactly paint the most accurate picture of a company's performance when compared to IFRS.Â
The good thing about IFRS is that it is more principal-based. This means that it is more concerned with painting a clear picture of company performance, sustainability, and stability especially when being directly compared to another company. This is better for investors, employees, clients, and anyone else with a vested interest in the firm. It also helps to keep the firm honest and transparent so that they are less tempted to use illegal methods of accountancy.
One of the few down sides to IFRS is that it is not what the US is used to using. The changes, although most are subtle, would create an impact on the way companies are taxed and retain revenues. The scale of impact on the economy is one that is open for interpretation.
Although FASB (Financial Accounting Standards Board) has not set goals to make the major switch to IFRS yet, there are signs of GAAP coming closer to a convergence. With well over 100 countries adopting the alternate set of standards, it may not be long before the US does the same. Dates have been set to address a possible change with regards to how FASB could change GAAP. With a large percentage of US companies having operations in other countries around the world, many have used IFRS along with GAAP for internal use. It is only a matter of time before firms will be required to adapt methods of the IFRS for external use.