Throughout the history of accounting, both the public and private sector of the business world follow certain guidelines and principles, in order to report financial statements in a clear and consistent manner. In the United States, these guidelines are the Generally Accepted Accounting Principles (GAAP). However, in other countries another set of principles has been created for them to follow, these are the International Financial Reporting Standards. Recently, accounting standards boards worldwide have been comparing them. Analysts are predicting a shift from GAAP to IFRS, so now we ask ourselves is the shift worth it? Are the principles between both boards too similar or too different? And if similar enough, when will this happen?
The United States and International standards do contain differences but the general principles, framework, and accounting results between the two standard boards are similar. The IFRS is built closely to the principles of US GAAP. The financial statements used in both the United States and internationally include: balance sheet, income statement, comprehensive income for GAAP or statement of recognized income and expense for IFRS, and statement of cash flows. Both accounting standards also require that these financial statements be recorded on the accrual basis of accounting. These are the major similarities between GAAP and IFRS. The differences between the two have never been clearly published but in general, the IFRS standards are broader and not as restrictive as the US GAAP. The IFRS prefers to leave the implementation of the principles to the individuals or entities that are auditing or preparing the financial statements. But, both still use a code of ethics to ensure that corruption within corporations does not happen even if IFRS more hands off.
After analyzing the similarities and differences between the two, is now the appropriate time for the United States to make the conversion to the International Financial Reporting Standards? Recently, accountants and analysts feel that this change is upon us. The world wants to have a common set of standards for all accountants to follow. However, similarities aside there are still too many differences between the two systems. These differences can cause major issues in the business world, not just the United States but the rest of the world as well. The US’s Financial Accounting Standards Board and the International Accounting Standards Board have been attempting to put these differences aside in order to achieve the goal of convergence between their individual principles. In 2002, the Norwalk Agreement was publically declared in order to show their commitment. Since this announcement both boards have made significant advancement towards their goal. The United States Security and Exchange Commission (SEC) have been actively involved in this area. In 2007 CFO.com stated, “within the past two years, the SEC eliminated the requirement for foreign private issuers to reconcile their IFRS results to US GAAP and proposed an updated ‘Roadmap’ addressing the future use of IFRS by certain large companies as early as 2009 and contemplates mandatory adoption for all companies by 2014, 2015, or 2016.” Regarding this statement, it is easy to understand that a convergence between the accounting standards is upon us.
The merge between GAAP and IFRS may be a shock to the system but for the future of accounting, it is a smart idea. By doing this, all financial statements will be similar. This will make it easier for accountants, auditors, financial statement preparers, etc. to compare and evaluate a company’s performance no matter what country they are from. This is also necessary to make it easier to understand financial statements prepared by publicly traded US companies that go international. The convergence will make more sense so people in foreign countries can understand their reports.
The change may be difficult for US accountants who are unwilling to adopt these new standards but in the long run this is a smart decision. The only reason that the conversion may be postponed is American accountants not wanting to or having difficulty learning a new set of standards. However, the future of the accounting world needs this change to happen sooner then later. In order to keep up accounting consistent and organized, GAAP needs to be converted to IFRS.
