GAAP and IFRS: the effects of globalization


Globalization has had a major impact on the way accounting is practiced around the world. The reason for this is that the laws are diverse in each and every country. American accountants must follow Generally Accepted Accounting Principles (GAAP). Worldwide, there are currently more than 115 countries using International Financial Reporting Standards. Due to globalization, the Securities and Exchange Commission (SEC) has planned for all US companies to use IFRS by 2015. (Kieso)

Accountants understand that global businesses will best benefit from a single set of accounting standards. The Financial Accounting Standards Board, a major source for the documents found within GAAP, and the International Accounting Standards Board, by which IFRS was issued, have stated that they will begin merging GAAP and IFRS by issuance of a memorandum of understanding. This is often referred to as the Norwalk agreement and provides that the two Boards will: make their existing financial reporting standards fully compatible as soon as possible, and coordinate their future work programs to ensure that, once achieved, maintain compatibility. (Kieso) This merger of accounting standards will not be as easy as said considering that GAAP and IFRS contain some important differences.

The first big difference between GAAP and IFRS is that GAAP is considered “rules-based” and IFRS is considered “principles-based”. The fact that GAAP is considered rules-based means that the research is more focused on the literature and the principles-based concept of IFRS is focused on reviewing fact patterns. In a principles-based accounting system, areas of interpretation or discussion may be clarified by the standard-setting board and provide fewer exceptions than a rules-based system. (Forgeas) The SEC is trying to find the right balance between “educated” professional judgment and “guessed” professional judgment. (Forgeas) As long as these two sets of standards exist, the same accounting situation can be realized in different ways, which will influence the legitimacy of the financial statements. For example, GAAP follows the LIFO and FIFO methods for calculating inventory costs, but IFRS only follows the LIFO method. Granting the practice of different methods will certainly change the way financial statements are interpreted; influence the judgment of external users who consult the financial statements.

Other problems also arise from the conceptual differences between GAAP and IFRS. Some of these issues are how the income statement, 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 on 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 under GAAP, but using IFRS development costs can be capitalized. (Forgeas) Intangible assets are only recognized if the asset will have 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 problems to occur, because there are numerous companies that expand their operations to other nations. Businesses in the US are offshoring to other countries to cut costs and lessen the number of regulations they have to follow. The convergence of GAAP and IFRS is extremely important so that those business transactions can be reported correctly. This brings up another problem; what about the education needed to execute so many changes to accounting standards. There are approximately more than 650,000 Certified Public Accountants (CPAs) in the United States; meaning that they would need to be slightly re-educated to practice the convergence of GAAP and IFRS. (Harper) Retraining thousands of people will be extremely expensive and, in most cases, will not come down to the person paying for the training; most likely, this cost will be added to the expenses of the companies. After training, companies will still need to transition to the new reporting method; various departments will need to change their processes. Again, these mods are always easier said than done and will take time to finish.

This list of how globalization affects accounting standards and the differences between GAAP and IFRS is certainly not all-inclusive, but it does show just how big of an impact it is having. Although it may be difficult to achieve convergence of the two sets of standards, it is certainly better to make a single set of standards to be used on a potentially global basis. In conclusion, the transition process will take time to discover the advantages and disadvantages of how to report specific financial statements, but it will improve the way of doing business internationally.

Forges. (North Dakota). AICPA | Retrieved April 13, 2015.

Harper. (North Dakota). 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 US GAAP? Retrieved April 13, 2015.

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