GAAP and IFRS: The Effects of Globalization

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Globalization has greatly impacted the way accounting is being practiced worldwide. The reason for this is that laws are diverse throughout each and every country. U.S. accountants are required follow the Generally Accepted Accounting Principles (GAAP). Worldwide, there are currently over 115 countries using the International Financial Reporting Standards. Due to globalization the Securities and Exchange Commission (SEC) has planned to have all U.S. companies using IFRS by 2015. (Kieso)

Accountants understand that global business will benefit best from a single set of accounting standards. The Financial Accounting Standards Board, a major source of the documents found within GAAP, and the International Accounting Standards Board, whom IFRS was issued by, have both stated that they will begin to merge GAAP and IFRS together by issuing a memorandum of understanding. This is often referred to as the Norwalk agreement and states that the two Boards will: make their existing financial reporting standards fully compatible as soon as practicable, and coordinate their future work programs to ensure that once achieved, compatibility is maintained. (Kieso) This merger of accounting standards will not be as easily done as said considering GAAP and IFRS do contain some major differences.

The first major difference between GAAP and IFRS is that GAAP is considered “rule-based” and IFRS is considered “principle-based”. The fact that GAAP is considered rule-based means that the research is more focused on the literature and the IFRS principle-based concept is focused on the review of the fact patterns. In a principle-based accounting system, the areas of interpretation or discussion can be clarified by the standards-setting board, and provide fewer exceptions than a rules-based system. (Forgeas) The SEC is trying to find the right balance between “educated” professional judgement and “guessed” professional judgement. (Forgeas) As long as there are these two sets of standards the same accounting situation can be done in different ways which will sway the legitimacy of financial statements. For example, GAAP follows both LIFO and FIFO methods to calculate inventory costs, but IFRS only follows the LIFO method. The allowance for the practice of different methods will certainly change how the financial statements are interpreted; swaying the judgement of the external users viewing the financial statements.

Other issues also stem from the conceptual differences of GAAP and IFRS. A few of these issues are how statement of income, earnings-per-share, development costs, and intangible assets are reported. Under GAAP, extraordinary items are shown below net income, but under IFRS extraordinary items are not segregated in the income statement. Under GAAP, earnings-per-share is found by averaging the individual interim period incremental shares, but IFRS does not take an average. Development costs are considered expenses following GAAP, but using IFRS development costs can be capitalized. (Forgeas) Intangible assets are only recognized if the asset will have a future economic benefit and has measured reliability under IFRS, but when it comes to GAAP intangible assets are recognized at fair value. (Nguyen)

Globalization has caused these issues to occur, because there are numerous companies expanding operations into other nations. Companies in the U.S. are off-shoring into other countries to lower costs, and to decrease the amount of regulations they are required to follow. The convergence of GAAP and IFRS is extremely important so those business transactions can be correctly reported. This brings up another issue; what about the education needed to execute so many changes to the accounting standards. There are roughly more than 650,000 Certified Public Accountants (CPA) in the United States; meaning that they would need to be slightly re-educated to practice the convergence of GAAP and IFRS. (Harper) Re-educating thousands of people will be extremely costly and in most cases it will not come down to the individual person paying for the training; this cost will most likely be added to the companies’ expenses. After training, companies will still have to transition into the new method of reporting; it will be required for multiple departments to change its processes. Once again, these modifications are always easier said than done and will take time to be finished.

This list of how globalization effects accounting standards and the differences between GAAP and IFRS is certainly not all inclusive, but it does show how great of an impact it has. Though it may be difficult to converge the two sets of standards, it is undoubtedly for the better to make just one set of standards to be used in a potentially worldwide aspect. In conclusion, the transitioning process will take time to figure out the odds and ends of how to report specific financial statements, but it will make for an improved way of handling business internationally.

Forgeas. (n.d.). AICPA | Retrieved April 13, 2015.

Harper. (n.d.). Retrieved April 13, 2015.

Kieso, D., & Weygan, J. (2013). Intermediate accounting (15th ed.). Hoboken, NJ: Wiley.

Nguyen. (2010, January 13). What are some of the key differences between IFRS and U.S. GAAP? Retrieved April 13, 2015.

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