US GAAP Vs IFRS

Both the Financial Accounting Standards Board and International Accounting Standards Board have declared their willingness to converge International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP). With companies engaging in business all over the world, it makes sense that there would be one set of accounting principles to be followed. The current complexity of U.S. GAAP has made it difficult for companies to accurately abide by all of the regulations. The convergence of IFRS and U.S. GAAP should be a good thing for all businesses and should simplify the process of financial reporting.

What exactly is GAAP? U.S. Generally Accepted Accounting Principles are accounting regulations used to prepare, present, and report financial statements for all types of companies in the United States. On the other hand, the goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements. As of now, approximately 120 nations have adopted IFRS and require it for their domestic companies. The Securities and Exchange Commission has stated that it believes the United States will convert to IFRS by 2014; however, this date is subject to change (E&Y, 2009).

There are many similarities and differences between GAAP and IFRS. One big similarity between the two relates to financial statement presentation, both GAAP and IFRS require a balance sheet, income statement, other comprehensive income for US GAAP or statement of recognized income or expense for IFRS, along with a statement of cash flows and notes to the financial statements. Also, both require that the financial statements be prepared on an accrual basis. One difference when it comes to financial presentation is that U.S. GAAP requires companies to report expenses based on function, whereas IFRS allows companies to report expenses either by function or nature. However, if function is selected than the company must include certain disclosures about the nature of the expenses in the accompanying notes. Other big differences between U.S. GAAP and IFRS is that IFRS does not allow extraordinary items to be reported on its income statements nor does it permit Last In, First Out (LIFO).

IFRS is intended to be a more principles-based set of standards rather than the rules-based approach of U.S. GAAP (2007, Gill). IFRS currently has over 2,000 pages of accounting regulations, whereas the U.S. GAAP is made up over 2,000 pronouncements, in which some of these pronouncements are several hundred pages long. By simply looking at the significant difference in numbers, one can easily conclude the U.S. GAAP is much more detailed than its counterpart IFRS. IFRS standards tend to be broader than U.S. GAAP principles. Therefore IFRS standards allow for more interpretation.

Convergence efforts by themselves will not completely eliminate the differences between GAAP and IFRS. There are currently still differences in certain standards where the convergence has already taken place and unless the words of the standards are completely changed, interpretational differences will still exist. The success of a consistent set of global accounting standards also will depend on national regulators and industry group's willingness to refrain from giving their interpretations on IFRS principles, that ultimately will provide them with exceptions from the IFRS principles (2009, E&Y).

Many believe that IFRS is easier to use than U.S. GAAP and that it will result in better reporting. There is no doubt that IFRS will save money for those companies who have gone global because they will no longer have to spend money doing two sets of books. Not only will IFRS save global companies money, but also by having one accepted set of standards will allow for greater comparability. However, some skeptics believe that the costs associated with adopting IFRS will outweigh the benefits.

Regardless of whether or not one believes in the convergence of IFRS with U.S. GAAP, it is happening and it is just a matter of time before it is completed. With companies engaging in business globally, the convergence of IFRS with U.S. GAAP should improve the financial statements for global investors. Now all business around the world will have the same set of standards to follow, which will clear up any confusion when it comes to comparing one company's books to another's. IFRS and U.S. GAAP have the same basic underlying principles, which should make the convergence smoother, and allow for an easier transition for all companies, when it comes to adopting the new set of standards.

1. Gill, Lawrence M. "IFRS: Coming to America." Journal of Accountancy. Web. 20 Oct. 2010.
< http://www.journalofaccountancy.com/Issues/2007/Jun/IfrsComingToAmerica.htm >.

2. IFRS and US GAAP-similarities and differences. Publication. PricewaterhouseCoopers,
2009. Print.

3. US GAAP vs. IFRS The Basics. Publication. Ernst & Young, 2009. Print.

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Convergence With IFRS - Initial Steps

The world over, there is much talk on IFRS and convergence of local GAAP to IFRS. The SEC in 2007 abolished the requirement for the foreign companies from providing a reconciliation statement between their financial prepared under IFRS to financial in US GAAP. Thus, the SEC made a major statement in 2007 itself that foreign companies listed in the US need not convert their IFRS prepared financial to financial confirming to US GAAP.

The first foreign company in US to file its financial without a reconciliation to US GAAP is Novartis AG when it submitted its Form 20-F on January 28, 2008.

There has been much buzz since then about IFRS and convergence of US GAAP with IFRS as issued by IASB. This buzz is synonymous with the buzz that was created when the Sarbanes Oxley Act (SOX) was made mandatory in US in 2002.

Its a known fact that the industry heavyweights in US would have to start reporting their financial under IFRS from 2014 onwards. And once that is done, it would be sooner than later that IFRS mandated financial would become the norm of the day for all the listed companies.
Now that we have understood the importance and the implication of IFRS in US, let us now understand how would companies approach this new mechanism.

Since its a new concept, it would be better to involve professionals like Indian CPAs, who would already have experienced the transition process (since India is moving to IFRS in 2011) and would have a 3 years experience in reporting under IFRS.

The transition to IFRS would first need to be broken into 3 steps:

1. Initial Stage:- The professionals would need to understand the business as the first step towards transitioning to IFRS and then define the scope of the work as well as define time period for the process.

2. Planning Stage:- In this stage, the professionals would need to

(a) Clearly define the limitations in the business
(b) Select the team for enabling a smooth transition
(c) Study the transactions in detail to understand the implications

3. Execution Stage:- This is the crucial stage of actual execution of the process and would involve

(a) Preparation of checklists by the professionals
(b) Interviews and discussions with the concerned individuals controlling the
specific processes3
(c) Documentation of the transactions under IFRS
(d) Reporting the financial under IFRS
Although it sounds very easy, the transition will not be very easy process and companies need to be alert and cautious while going in for such a step.

The IFRS 1 states that:

(a) An entity's first financial statement under IFRS would be the statements prepared under IFRS.

(b) An entity shall prepare an opening IFRS balance sheet at the date of transition to IFRS. This would

be starting point for the entity's accounting under IFRS.
(c) Such opening IFRS balance sheet need not be presented in its first IFRS financial statements.

(d) While preparing the opening IFRS balance sheet, an entity shall:
- recognize all assets and liabilities whose recognition is required under IFRS.
- not recognize such assets and liabilities as are not permitted by IFRS.
- reclassify those items that were recognized under local GAAP as one type of asset/liability/equity, but are a different type of asset/liability/equity under IFRS.
- apply IFRSs in measuring all recognized assets and liabilities.

It would be pertinent to note that IFRS grants limited exemptions from the above requirements in specified areas if the cost of compliance would most likely exceed the benefits therefrom.

Also, the IFRS prohibits the retrospective application of IFRSs in some areas, particularly if the retrospective application would require judgment by the management on past condition whose outcome is already known.

IFRS also requires the entity mention how the transition from previous GAAP to IFRS affected the entity's reported financial position, financial performance and cash flows.

With so much requirements and so much at stake, it would only be wise to seek help of experienced professionals in transitioning to IFRS.
India would be converging to IFRS by 2011 and that means Indian CPAs who would have at least 3 years of experience in reporting under IFRS; businesses in US have a very nice choice to opt for when they transition to IFRS.

Steve is a qualified accountant (Indian CPA) and co-founder of APT Services, the fastest growing outsourced accounting service provider in India. Steve has over 10 years of expertise in audits, accounting (both US & Indian GAAP), payroll and tax preparation services. For details on services provided by APT Services, log onto [http://www.aptservicesonline.com]

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IFRS - New King of American Accounting?

Introduction

The International Financial Reporting Standards, commonly referred to as IFRS, is emerging as the dominant global accounting model. Traditionally, the United States has been the worldwide model for accounting procedure with their use of GAAP (Generally Accepted Accounting Principles). Today, more than 100 countries worldwide accept IFRS as their primary accounting standards or permit its use. This trend has led to much speculation about whether or not the United States will move away from their traditional use of GAAP and also adopt IFRS for its accounting guidelines. This would have a tremendous impact on American businesses as well as accountants, financial planners, and investors in the United States and abroad.

Adoption of IFRS

Many experts speculate the United States is on track to switch to IFRS as early as 2014. Ultimately, the SEC, government, and FASB (Financial Accounting Standards Board) are the controlling powers as far as the adoption of IFRS. Some large multi-national corporations with foreign subsidiaries have begun using IFRS. The FASB has stated that it will include IFRS questions on their CPA exams starting in 2011. Also, businesses and institutions of higher education are already training accountants in IFRS procedure. American multi-national conglomerates are pushing for IFRS because they will not have to keep two sets of accounting books - one for GAAP and one for international subsidiaries that are required to use IFRS. Considering all of Europe and the leading economic powers of Asia, South American, and Africa have all adopted IFRS, it seems as though the United States will, too.

Advantages of IFRS

If the United States switches to IFRS as their accounting principle standard, all publicly traded companies would report on the new international standard. This change would not affect not-for-profit institutions and small businesses. By switching to IFRS, American international businesses would become more competitive because global investors would be able to decipher companies financial statements with less difficulty and with greater confidence. Because they would already be familiar with the accounting standards of IFRS, investors may be more likely to invest in companies since they have an understanding of accounting principles of revenue, inventory, liabilities, etc. For example, GAAP and IFRS report inventories differently. So a prospective investor familiar with IFRS more clearly understands the financial position of a company. This benefit is on a smaller scale. One must also consider investments on a larger scale. Foreign corporations are also more likely to invest in US businesses if everyone was adhering by the same standards. Studies have shown a convergence from GAAP to IFRS, more often than not, improves a companies financial statements with IFRS. This is good news for businesses as well as investors.

Disadvantages of IFRS

Implementing a new accounting standard nation-wide could potentially be expensive and frustrating. Accountants, CPA's, and businesses who are accustomed to GAAP are forced to learn new principles under the international system. This will require training and re-education of the workforce in order to implement a new accounting system. There are certificate programs as well as other education programs currently available for people to gain knowledge and experience with IFRS. Some experts believe IFRS is the biggest change in accounting policy since GAAP was established in the 1930's.
Also, IFRS is more broadly defined as to its guidelines. GAAP on the other hand, is much more specific in its overall principles and constraints. It may be easier for accountants to use IFRS because it allows for some objective decision making in regards to how businesses interpret IFRS. This fact may cause some distrust among American investors who are unfamiliar with IFRS. A key reason for the success of GAAP is its detailed, rule oriented approach to accounting.

Conclusion

Because of the international acceptance of IFRS, it seems inevitable that the United States will be adopting IFRS sooner, rather than later. The groundwork is being laid for the transition away from GAAP. The market today truly is a global economy and this is proof of that fact. IFRS has been tested around the world and the majority agrees it has been successful. This is a progressive way of thinking and being innovative in today's worldwide market place. Although the transition ultimately will not be seamless, groundwork for adoption is being presented by FASB and other accounting foundations. The re-education of current accountants along with educating and training new accountants is crucial to the success of businesses using IFRS. Since IFRS questions will be on the CPA exam starting in 2011, IFRS education has already begun with the next generation of CPA's. After the transition period from GAAP to IFRS, the United States will benefit from a global, homogenous accounting system in today's global economy.

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The Issues of Implementing IFRS in Developing Countries

First started by the International Accounting Standards Board (IASB) in 1975, IFRS began as an alternative to the American-used GAAP, Generally Accepted Accounting Principles. Today, over 100 countries worldwide use IFRS, most of which joined during the 1980's and 1990's (Larry). In order to fully understand all of the pros and cons of IFRS, one must look at what a country was like before implementing it. In 1981, H. P. Holzer and J. S. Chandler researched the accounting issues in the developing countries of Tunisia, Tanzania, Fiji, Thailand and Pakistan in the enterprise sector, local accounting professions, accounting in the government sector and the education of accounting. What they discovered was horrifying as compared with American accounting; late closings of accounts (sometimes years late), shortages of proper accounting manuals and deficiencies of qualified staff. Specifically, in the enterprise sector, developing countries saw issues of lack of accountants, bookkeepers and even auditors because the businesses could not afford to give as high salaries as the private sector. What staff members they did find were very under qualified and the lack of on job training made this worse. The enterprises' accounting systems were out of date with no accounting manuals or forms. Because of the poor accounting systems, there were absolutely no internal controls, which of course can lead to fraud and abuse. The financial statements that were made were as late as three years old.

Without any proper financial statements, management cannot make proper decisions for the organization and the actual financial position of the business is questionable. This led to lack of international investors interested in the businesses. In order to help improve the situation of the financial statements, auditors had to step in. Because so many businesses needed help from auditors just to complete monthly and annual statements, this created an even worse staffing situation. The governmental sector of these developing countries was just as horrendous, if not worse. Government agencies can only afford smaller salaries than mentioned in the enterprise sector, so staffing is an even bigger problem. The accounting basis is usually cash-based as opposed to a modified or full accrual basis. This basis is very outdated for the needs of accounting in governments. As also with the enterprise sector, financial statements that were made were inaccurate or not even made at all, calling more help for external auditors. With incomplete statements, the finances of the government were uncertain, including foreign debt which had a negative impact on foreign trade. As for the professional accountants of the developing countries, there was still a lack of staffing, although not as much of a concern as in the previous sectors. The reasons for this were different; many accountants that were trained for this sector ended up more often in the richer developing areas of the countries, leaving the poorer developing areas without proper staffing. The staff that did exist was used inefficiently; as stated before, the auditors of the accounting firms were stuck with having to reconcile the inadequate financial statements. The problems of the enterprise and governmental sectors negatively impacted the professional sector with their lack of adequate records and no internal control. Finally, the education sector was where all the problems started. In developing countries in the 1980's, there were few universities that actually offered an accounting program. The programs that were taught, educated students more about the accounting procedures in developing countries. By the time these students were ready to enter the workforce, they discovered that they were unable to fully understand the differences of the developing country's accountancy. The poor education of the students stemmed from a lack of educated teachers, textbooks and properly secondary school educated students (Holzer). The four accounting sectors in developing countries all affect one another with their problems and deficiencies. The solutions to these problems can be solved over time by the improving of education in these countries as well as strengthened accounting standards. The International Financial Reporting Standards would ultimately enable these countries to fix these problems. Today, only three out of five of the developing countries mentioned now have implemented IFRS. Fiji and Tanzania have already fully adopted IFRS while Pakistan is still in the process of converting to it. Thailand and Tunisia still use their systems similar to GAAP, however both countries accounting systems are currently converting to GAAP systems closer to IFRS ("IFRS"). Although not all of these countries have fully adopted IFRS as their financial reporting standards, they are on the way to doing so. This means that the problems in their previous accounting systems are reducing. However, adopting IFRS is not an easy process for a country. Next, we will discover the challenges of converting to IFRS.

There are several reasons why countries decide to convert to IFRS including the desire for foreign investments, smaller costs and the listing of companies in other countries' stock exchanges. The challenges that a country may face in the adoption process include awareness, regulations on reporting, compliance, and training. In the case of Nigeria, university student Abdulkadir Madawaki considers these challenges of implementation. Awareness of IFRS is the foremost important step of conversion. As Madawaki states, "implementation of IFRS requires considerable preparation both at the country and entity levels to ensure coherence and provide clarity on the authority that IFRS will have in relation to other existing national laws" (156). Auditors, accountants, regulators and educators all need to be made aware of the new accounting standards of the country and what it means for them. In order to fully convert to IFRS, countries must be able to make changes in their current tax reporting laws. According to Madawaki, "accounting issues that may present significant tax burden on adoption of IFRS include determination of impairment, loan loss provisioning and investment in securities/financial instruments" (157). These adjustments to current tax laws are complex and can be very confusing, but with a proper regulatory system, can better the accountancy in the country. Some of the existing laws in these countries are also amended or repealed by the adoption of IFRS. While it may be a hard process to reverse some of these laws, implementation of IFRS requires this to be done. Training and education are of paramount importance when a country is converting to IFRS. Education in developing countries of IFRS can cause a problem as there may be a lack of professionally trained educators. This means that there will be a lack of competent individuals in the accounting profession. The accountants that were already trained in old accounting practices will need to relearn the financial reporting under IFRS. Another issue with training is that the costs of accounting manuals are too high for many companies to afford. (Madawaki 156). Fully capable and trained accountants can ensure the proper implementation of IFRS in order to receive its full benefits. Finally the last challenge of implementing IFRS is compliance. Full compliance of IFRS results in more benefits from the standards. Written in the Journal of International Accounting Research, Francesco Bova and Raynolde Pereira research compliance levels of IFRS in Kenya. What they discovered is that there are better compliance levels in publicly traded firms as opposed to private firms. Their reasoning for this is that stockholders in public firms demand better and more concise financial statements than do the stockholders in private firms. This is probably true because public stockholders have more of a tendency to keep up to date with the company's financial statements while private stockholders are less hands on and only request financial statements as needed (Bova 89). More communication of the business to the stockholders will create a stronger need of compliance to IFRS. A weaker compliance in IFRS will overall hurt the firm's financial structure. Proper compliance is needed of IFRS in order to get its full benefits. In the next section, solutions to the issues of adoption and implementation will be discussed.

While implementation of IFRS may cause problems in a country, there are some solutions that could make this better. In regards to awareness, a country's government, its accounting associations, as well as the IASB need to work together to make accountants and others working with financial statements conscious of IFRS' new standards and laws. Awareness will in turn create a more successful compliance rate. New laws and adjustments to previous laws are set in place in the conversion process of IFRS. A proper governing regulatory body should be set in place to ensure that accountants are correctly instituting these laws. Compliance to regulation of new and changed laws will lead to stronger overall compliance to IFRS. Training and education in IFRS is the best way to make individual accountants ready to use the new standards. Universities in countries implementing IFRS need to provide proper education in the new reporting standards. On-site training at work of IFRS can be improved by having affordable accounting manuals and programs. Governments should find ways to be able to attract accounting students and professionals to stay in the developing country for accounting work, instead of going to a more developed country. Perhaps a monetary incentive given to individuals that stay in their home educated country to do accounting would encourage more professionals to stay there. This will ultimately tackle the lack of staff problem as seen in countries before implementation of IFRS. Proper training and education will also in turn improve compliance levels. Finally, compliance levels of IFRS can be improved by auditors and accounting associations making sure of proper compliance. As stated before, more compliance is typically seen with public firms as opposed to private firms. A solution to this would be for private firm stockholders to be more hands on and to more frequently ask for financial statements. The solutions given to the other problems of IFRS also will result in greater compliance. With all the solutions to the implementation of IFRS in place, the higher compliance level will make IFRS more beneficial to the country. More awareness, better regulatory bodies, more education and training of IFRS will result in a higher compliance level which will lead to cheaper costs of operations, more investments from foreign countries by having higher quality financial statements and a higher reputation for companies that are able to be listed on other countries' stock exchanges.

Works Cited

Bova, Francesco, and Raynolde Pereira. "Determinants and Consequences of Heterogeneous IFRS Compliance Levels Following Mandatory IFRS Adoption: Evidence from a Developing Country." Journal of International Accounting Research 11.1 (2012): 83-111. Print.

Gray, Larry, CPA, MBA, and Marc Fogarty, CPA, CFE. "IFRS America International Financial Reporting Standards IFRS." Is IFRS Good for America? EisnerAmper Accountants and Advisors, 9 Feb. 2010. Web. 3 Apr. 2013.

Holzer, Peter H. and John S. Chandler. "A Systems Approach to Accounting in Developing Countries." Management International Review, Vol. 21, No. 4 (1981), pp. 23-32.

"IFRS Adoption by Country." PricewaterhouseCoopers LLP (2012): n. pag. Print.

Madawaki, Abdulkadir. "Adoption of International Financial Reporting Standards in Developing Countries: The Case of Nigeria." International Journal of Business and Management 7.3 (2012): 152-61. Print.

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Future of Accounting - IFRS Vs GAAP

The actions of Bernie Madoff and Kenneth Lay (Enron Co.) made quite an impact on business America. While thousands lost everything they had, the U.S economy lost something far greater; their ethical backbone and credibility. Since then, many consumers, corporations, and world economies put the U.S. economy under a microscope. GAAP and industry standards have been scrutinized, revised, and reformed. Despite the recent changes and strengthening of U.S. GAPP, the adoption of the International Financial Reporting Standards (IFRS) has become a potential possibility.

The adoption of IFRS has several positive attributes, with its greatest being the improvement of financial reporting to global investors, the facilitation of cross-border investments, and the integration of capital markets. Given that the global "IFRS network" has already reached a significant scale, the United States would benefit greatly by conforming, rather than remaining in the smaller underdeveloped IFRS network. It is difficult to gauge the magnitude of the effects but several studies and beliefs exist regarding the various effects of adopting IFRS.

There are U.S firms that already have a global presence with international operation that would realize significant cost savings from the use of a single set of financial reporting standards. Being a foreign subsidiary of the U.S requires compliance with the domestic reporting standards of their domicile and U.S GAAP. Additional costs arise from the duplication and translation of financial reporting information.

Empirical studies show that the costs and benefits of IFRS adoption vary amongst firms. Evidence shows that voluntary IFRS adoption typically results in benefits exceeding costs. Voluntary adopters tend to have similar characteristics; larger in size, more likely to have international dispersed operations, more diffused ownership, and rely more on outside funding. In some respects, GAAP creates barriers for many U.S. companies limiting both expansion and growth. Consistent with the notion of comparability benefits, the primary beneficiaries of IFRS adoption would be the U.S. multinational firms, as well as their investors.

Several other patterns have emerged from studying foreign nations that primarily use or have already adopted IFRS. All accounting standards use discretion, since several figures stem from evaluations and approximations (such as the useful life of an asset, the value of company goodwill, etc). IFRS is no exception, and whether firms implement IFRS in ways that make the numbers more informative (such as footnotes and recognition) still poses a threat to the reliability of information. A single set of accounting standards does not guarantee the comparability of firms' reporting practices, since enforcement is not the sole influence in achieving successful results. Ethics and other variables will always play a factor in the exercise of any accounting standards. It is essential to realize that the key elements of an institutional infrastructure fit and reinforce each other.

The best results have been seen in countries with strict enforcement regimes and institutional structures that provide strong reporting incentives. These countries are more likely to have discernable capital-market effects when using IFRS reporting. A "serious" commitment to IFRS has shown larger cost of capital and market liquidity benefits compared to adopting IFRS as a "label". The comparison of accounting numbers under German GAAP against the use International Accounting Standards (IAS) for the same years reveal greater total assets, and book value of equity under IAS.

Mixed results including the benefit of mandatory IAS, do exist however between various industries. Regardless, a study spanning 26 different countries, with strict enforcement regimes and strong reporting incentives consistently showed an increase in market liquidity of 3-6%, a decrease in firms' costs of capital, and a corresponding increase in equity valuations. Voluntary adopters of IFRS have better initial reporting incentives and are more responsive to institutional changes (switching to IFRS), resulting in greater benefits over the mandatory adopters. This raises the question whether the benefits received reside in the type of accounting practices and standards used or instead the incentives and changes that lie in other institutional factors. Perhaps creating standard incentives for strict adherence to the current GAAP would have a similar effect as adopting IFRS.

The intensity of public enforcement efforts in the U.S is unparalleled not just in terms of rules and regulations but also the staffing levels and budgets, actual enforcement actions, and sanctions imposed. The primarily enforcement agencies are the Securities Exchange Commission (SEC), U.S Congress, and the courts. In this aspect, the U.S stands as one of the greatest potential beneficiaries of IFRS.

In comparison, U.S. GAAP and IFRS are based on the same underlying philosophy, roots used in common law tradition, and capital-market orientation. In fact, U.S. GAAP constitutes a set of high-quality standards that is fairly similar to IFRS and expected to be even closer by the time the U.S may adopt IFRS. The IFRS adoption would be an easy transition insuring the same quality and benefits already enjoyed with GAAP. The comparability benefits and network effects of IFRS, however, provide a strong rationale to make the switch. Even if these benefits are modest, they are recurring in nature and accrue in the long run.

The U.S. uses GAAP that already mimics IFRS, has a large number of international operations, and monitors business through a strict enforcement regime. When considering the switch we must evaluate the cost-benefit trade off. The cost of IFRS would be the initial transition and the shift of accounting authority to the FASB. In return, America would benefit from the comparability benefits previously discussed, which are modest but accrue over a long term basis, and the recurring cost savings of reporting, which mainly effect multinational U.S. companies. Regardless, U.S. GAAP is slowly evolving through its adoption of various standards and practices of the IFRS. Others, including myself feel that the capitalist nature of a free market society will eventually meld the two standards together pushing the global economy to a new level of success.

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The Negative Effects of IFRS Upon SMEs of the World

The United States is said to be a land of freedom and opportunity. It is a country filled with individual dreams and ideas of success. These may be the reasons why there are over twenty million entities which are classified as being small and medium-sized entities (SME's), not even to mention those that have grown beyond their original ideas and have created publicly traded corporations. Some now cross borders and oceans to involve individuals from other countries, backgrounds, and ideals. With the growing world comes innovation without boundaries, which in the end needs to be able to be receipted by others in order for them to understand what it is that these dreamers have now created.

On a more realistic and factual level, these businesses are not businesses without organization and reporting. In order for a company to be multi-national it requires the company to not only operate in several countries but to also to report their operations consistently throughout those countries. Even within single companies this is necessary for continuity and success, but the scale is on a smaller level. When one local baker needs to understand why his competitor is becoming more successful or the means to which they are able to budget what others cannot, comparability in financial records is the answer. The capability to record and document where an entity stands financially also gives support to investors and lenders before they take risks in a given company.

Reporting on finances is not new to the United States (or the world), with the installation of Generally Accepted Accounting Principles (GAAP) through the combined actions of groups and committees since the end of the Great Depression in conjunction with the laws and regulations which became the Principles. This system of reporting, though not agreed upon and signed into legislation by all countries and entities, created a system that seemingly created organization and comparability. But with new ideas and networks on the rise, the world has begun to shift towards international consistency. Smaller, less globalized entities are seeing increasing amounts of pressure to report in the same manner that mainstream stockholding companies of the world report as a result of the bigger entities needs to interpret statements from one country to the next. These actions are under the supervision and modification of the International Accounting Standards Board (IASB) (Grosu and Bostan 323).

The ISAB's set of accounting and reporting stipulations, International Financial Standards (IFRS), is relatively new, but the set of reporting laws which were created for these smaller businesses is even newer. The IASB (International Accounting Standards Board) published the 230 page IFRS for Small and Medium-sized Entities (SME) on July 9, 2009 (PwC 2) and has continued to monitor and revise the laws and limits as more countries and companies test the waters of the reporting system which had been simplified from the lengthier, more globalized set which had been created for entities who have business in numerous countries. IFRS for SME is simpler and more targeted towards the needs and standards of smaller entities (Moss Adams). But there continues to be negative effects and burdens which are placed on these groups which may seem to be unnecessary when Generally Accepted Accounting Principles (GAAP) had been working well up until this point.

One of the main effects IFRS for SME's has had on businesses that have used it so far, and it is assumed to continue for other SME's in the future, is the cost. Naturally there will be costs to any change within a system of reporting. For a small business without the knowledge and software that IFRS requires, the possibility of significant increases in cost have the potential to wipe out an entity entirely (#6). Between the expenses for a new software system, training from an IFRS expert and the costs to either hire new personnel or properly train existing employees, certain companies will not be able to keep their heads above the high tides of IFRS conversion. The complete conversion can possibly run as much as one percent of revenue. To add to this, if a SME uses LIFO in their reporting of inventory, they will need to spend additional time in order to be in accordance with IFRS ruling principles and this, "Accounting change frequently results in negative tax consequences," (ERRC). On top of this, until IFRS is actually placed into effect or removed entirely, clients and other companies may still continue the use of GAAP reporting. This would cause entities that are in the mist of conversion to report twice, adding a large sum of hours to the sometimes monotonous labor load already.

Regardless of the modifications which were meant to create a simpler set of IFRS for smaller companies who do not trade publicly, IFRS for SME's continues to be unproductive and unsuccessful. This is evident in other countries where IFRS for SME has already been enacted and tested. Companies from countries such as those found within the European Union have tested the waters and used the new regulations to begin the process of international reporting. Looking back on businesses in these countries experience with this reporting method shows that IFRS for SME still, though it is a vast improvement from full IFRS, is not ideal for these sized entities. They have stated that, "The average age of tax accountants is going up because no one wants to enter the profession anymore," as a result of the high compliance cost and large amount of change within the skill set and knowledge base as IFRS takes its toll on SME's (Beer 2). As for the actual regulations' consideration and modifications to better suit SME's reporting (particularly within Europe), feedback has shown that the benefit to SME's are still not kept in mind. "The IFRS for SME's as well as the full IFRS are based on a top-down-approach. This is completely incompatible to the important "think small first"-principle of European legislation," (UEAPME 5). In order for IFRS to be effective globally, there needs to be feedback which portrays the advantages of this system in all strata of classification. For one, fairly large, portion of the required field to be inflicted with such burdens and risk, IFRS cannot be the proper step for the world.

Due to the large amount of SME's that exist and, "dominate the business world, almost in every developed country from the economic... point of view," and on the basis that a large portion of even these companies have under fifty employees (Grosu and Bostan 323), even the SME variation of IFRS is not worth forcing upon them. The high costs of both set up and maintenance of the new system could potentially force these smaller companies to either remove themselves from operations or cause them to spiral out into bankruptcy or be bought out by larger companies to grow and expand. To go with this, the amount of negative feedback and evaluations from entities in countries where IFRS for SME's has been previously implemented shows that even with the modifications of its original full intent, SME's continue to struggle finding value in the cost of converting to IFRS. Overall, these large costs which are incurred in the process are not counteracted with sufficient outcomes. In order for IFRS to be successful for SME's in the future, the board must constantly and consistently monitor the implementation of the specialized SME version and find proper changes which will become beneficial to these smaller entities whose business and operations remaining within a single country, which can be handled by the current reporting system (GAAP in the case of United States businesses).

Beer, Stan. "Small Firms, Bog Worry; ACCOUNTING." Sydney Morning Herald 13 Nov. 2004, First ed., My Career sec.: 2. Print.

Grosu, Veronica, and Ionel Bostan. "IAS/IFRS Standards for SMEs and the Impact on the Romanian Accounting System." International Journal of Academic Research 2.4 (2010): 323-28. Print.

Moss Adams, LLP. "IFRS for SMEs/Private Companies." 2 Sept. 2009. Lecture.

Pricewaterhouse Coopers, comp. IFRS for SMEs: A Less Taxing Standard? PricewaterhouseCoopers, LLP, 2009. Print.

UEAPME, comp. Consultation of the International Financial Reporting Standard for Small and Medium-sized Entities. Rep. Belgium: European Commission: Internal Market and Services DG, 2010. Print.

"What the Latest IFRS Developments Mean to Private Companies - Mid-Market Blog." Economic Recovery Resource Center (ERRC). 27 Aug. 2010. Web. 8 Nov. 2010. http://blogs.cbh.com/midmarket/?p=2273.

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Are IFRS and GAAP Converging?

Generally Accepted Accounting Principles (GAAP) is the current accounting standards that public companies in the United States are required to follow since the mid 20th century. GAAP was issued by The American Institute of Certified Public Accountants and is currently enforced by the Securities and Exchange Commission (SEC). These rules are enforced in order to ensure that all financial statements and reports are free from manipulation, are accurate, consistent, and relevant. GAAP assumes that business is separate from its owners. Revenues and expenses should be kept separate from personal expenses. It is assumed that a business will operate indefinitely and that stable currency (the US Dollar) is going to be the unit of record. GAAP also assumes economic activities of an enterprise can be divided into time periods. Generally Accepted Accounting Principles are accounting rules that are used to prepare, present, and report financial statements and follows the cash basis of accounting

International Financial Reporting Standards (IFRS) are principle based standards that were issued by the International Accounting Standards Board after 2001. IFRS uses the accrual basis of accounting. The accrual basis of accounting assumes that revenues are recognized as they occur as opposed to when cash is actually gained or paid. Also International Financial Reporting Standards assumes that an entity will continue in operation until a foreseeable future. Financial capital maintenance is in nominal monetary units or traditional historical cost accounting, but financial capital maintenance is in units of constant purchasing power during low inflation and deflation. International Financial Reporting Standards, like Generally Accepted Accounting Principles is followed to ensure reliability, relevance, and comparability of financial reports and statements.

IFRS and GAAP differ. GAAP is rule-based and IFRS is principle-based. "The IFRS must follow LIFO when recording inventory, where GAAP allows a choice between LIFO and FIFO" (Wall 1). IFRS does not segregate extraordinary items on the income statement like GAAP does, and the earnings per share do not average the individual interim period calculations under IFRS rules. Earnings per share do average the individual interim period calculations under GAAP (Wall 1). These differences affect the decisions the SEC are currently facing due to globalization in the market.

The market today is becoming globalized. Due to this globalization, the United States market has been expanding to an international level. "As the United States businesses move towards a global economy, there is a need to move towards global accounting standards" (Hansen 15). Over one hundred countries have already adopted IFRS rules, and many are in the process of adopting them (Hansen 16). Eventually, all countries will follow the same standards.

In my opinion, IFRS should and will eventually be adopted. IFRS was supposed to be put into place during late 2012, but it is has been pushed back to a later date. In my opinion, it will be adopted within the next two years. I believe that due to globalization, IFRS should be adopted because it is a universal standard. Accounting is like a "language" of business. This means that if every country eventually adopts IFRS, they will all be speaking the same "language."

The SEC has many concerns about becoming international and making changes to GAAP (Leone 22). Some concerns of the Securities and Exchange Commission include a fear of affecting revenues and customer loyalty programs, affecting effective tax rates, and affecting company's capital needs. GAAP and IFRS recognize revenues differently which is an issue. I also believe that the biggest concern and challenge will be accounting for revenue. IFRS will drastically change revenue recognition.

IFRS also lets companies take advantage of declining costs, allows profit-boosting reversals, and makes the cash flow statement harder to evaluate because interest expenses appear in different places than GAAP cash flow statements. Because of the many concerns, the movement from GAAP to IFRS or the convergence of the two is happening very slowly (Leone 26).

Many larger multinational companies in the United States are welcoming these changes because the IFRS standards are nearly in every other country that they operate in anyway. These larger companies believe that the United States would benefit from the convergence to international rules. I, again, also believe that IFRS will benefit the United States because of globalization and being able to do business with other countries much easier because most of them already have adopted and follow IFRS standards. "IFRS standards will improve comparability between United States and non-US reporting companies" (Hansen 15). Movements towards international accounting rules will only mostly negatively affect smaller United States companies. Small companies believe the switch will be costly and that they will get little or no benefit from it. I also believe one of the main problems may be small businesses going out of business.

The United States is currently moving towards IFRS standards. The SEC and FASB is currently thinking of ways to incorporate international rules into the currently used US Generally Accepted Accounting Principles. The Securities and Exchange Commission has been monitoring the slow convergence and they are trying to take key elements from the IFRS to incorporate them into GAAP. In my opinion, the United States should adjust the IFRS standards. Other countries have done the same. This way, the United States can make the standards work for the needs of the businesses within the country. IFRS can be adjusted to fit the culture and needs of a country. I believe that the SEC should also slowly converge. One standard at a time will allow businesses to make the adjustments with more ease.

"Generally Accepted Accounting Principles may not necessary be replaced, but IFRS rules will supplement GAAP rules" (Wall 1). GAAP and IFRS rules will hopefully harmonize into a single set of Global Accounting Standards. The SEC hopes for prosperous, stable economy that will follow the new set of converged rules. In my opinion, I believe that it is a matter of time before IFRS is adopted and that it is inevitable that the standards will be put into place.

Hansen, F. (2008). Kiss GAAP goodbye. Workforce Management, 87(15), 16-17. Retrieved from EBSCOhost

Leone, Marie.(2011). IFRS Still Not Ready for the US.

Wall, K. (2010). Implications of the Convergence of International Financial Reporting Standards and Generally Accepted Accounting Principles. Conference Papers -- Law & Society, 1.

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IFRS Versus GAAP

There are two sets of accounting rules accepted for international use: U.S. standards referred to as Generally Accepted Accounting Principles (GAAP), and international standards known as International Financial Reporting Standards (IFRS). The first is developed by the Financial Accounting Standards Board (FASB), whose power is derived form the United States Securities and Exchange Commission (SEC). The second is developed  by the International Accounting Standard Boards (IASB), an independent London-based accounting standard-setting body. Although GAAP and IFRS share some similarities in presenting their financial statements, they do not agree on every issue. Differences do exist in reporting and classifying elements of Income Statements and Balance Sheets between these two sets of rules.

Unlike the more detailed GAAP rule-based standard, IFRS principle-based tends to be simpler in its accounting and disclosure requirements. The Income Statement is a required statement under IFRS as it is under GAAP and is known as the " Statement of Comprehensive Income". IFRS' statement of comprehensive income is similar to the one used by GAAP; nevertheless, few differences exist when comparing these two income statements.

Presentation of the income statement under GAAP follows either a single-step or multiple-step format. However, IFRS does not mention a single-step or multiple-step approach. Under IFRS, entities are required to classify expenses by either their nature (such as cost of material used, direct labor incurred, advertising expense, depreciation expense, and employee benefits), or their function (such as cost of goods sold, selling expenses, and administrative expenses). Although GAAP does not have that requirement, the SEC requires a functional presentation. While GAAP defines income from operation, IFRS does not recognize this key measure. In addition, extraordinary items are prohibited under IFRS; whereas, under GAAP, entities must report extraordinary items if they are unusual in nature and infrequent in occurrence. The portion of profit or loss attributable to the non-controlling interest (or minority interest) is separately disclosed in IFRS' statement of comprehensive income. Furthermore, while IFRS identifies certain minimum items that should be presented on the statement of comprehensive income, GAAP has no minimum information requirements. However, the SEC imposes stricter presentation requirements.

The presentation of the balance sheet is a requirement under both GAAP and IFRS. The most visible difference is how IFRS refers to this statement as the " Statement of Financial Position" rather than the Balance Sheet. The statement of financial position's accounts are classified under IFRS, which means that similar items are grouped together to arrive at significant subtotals. Also, the IASB indicates that the parts and subsections of financial statements are more informative than the whole; as a result, the IASB does not encourage the reporting of summary accounts by themselves ( for example, total assets, total liabilities, etc.). Unlike GAAP, IFRS' current assets are usually listed in the reverse order of liquidity. For instance, under IFRS, cash is listed last. In addition, most companies under IFRS present current and non-current liabilities as separate classifications on the face of their statements of financial position, except in industries where liquidity presentation provides more useful information. It is crucial to point out some major differences in reporting items in the balance sheet between GAAP and IFRS.

Under the current asset section, inventory is valuated differently under IFRS. The use of (LIFO) last-in-first-out is prohibited under IFRS. In addition, unlike GAAP, if inventory is written down under lower-of-cost-or-market valuation, it may be reversed in a subsequent period up to the amount of the previous write down under IFRS. Furthermore, IFRS permits the revaluation of property, plant, and equipment, and intangible assets and reports them as other comprehensive income.

IFRS uses different terminology in the equity section in its statement of financial position. For instance, Share Capital is the par value of share issued. It includes ordinary shares ( referred to as common share) and preferences shares ( referred to as preferred shares). Share Premium under IFRS' equity section is the excess of amounts paid-in over the par value.

A major problem caused by the disparity that is related to financial statement's presentation of GAAP and IFRS is the lack of uniformity. This problem creates difficulty in comparing financial statements across GAAP and IFRS. As a result, it is rational for U.S companies that have foreign subsidiaries to convert to IFRS in order to make it easier for stakeholders to make comparisons and allow themselves to access global capital markets. However, switching to IFRS may not be beneficial to small U.S firms; the conversion will result in incremental costs that might outweigh the  benefits.

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US GAAP Vs IFRS

There has been a growing demand over the past twenty years to harmonize the business world under one conceptual framework for reporting financial statements. Currently, there are two types of frameworks used throughout the accounting world. They are United States of America General Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS).
Presently more than seven thousand companies within one hundred countries worldwide use IFRS instead of U.S. GAAP. In order to harmonize these foreign capital markets, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) have been working together to converge U.S. GAAP with IFRS. The main purpose of this conversion is to have one general global financial reporting standard that allows financial statements to become more relevant and reliable. This would also allow for both United States and foreign companies to become more consistent and comparable within their financial statements. The overall objective of this conversion is to provide better financial information for capital providers, lenders, and stockholders.
The preparation and presentation of financial statements are similar between U.S. GAAP and IFRS. These financial statements include balance sheets, income statements, cash flows, and comprehensive incomes. During their preparation, companies are required to prepare on the accrual basis in both frameworks. Furthermore, U.S. GAAP and IFRS both contain components that are recognized in equity as constituents of comprehensive income; however, net income is still unchanged by these items. U.S. GAAP allows comprehensive income to be prepared in three different formats; single income statement, combined income statement of comprehensive income, and stockholders' equity section. IFRS also permits comprehensive income to be reported in stockholders' equity or in statement of recognized income and expense (SoRIE) format. Although the two frameworks are similar in ways, several conflicts between U.S. GAAP and IFRS exist particularly in the presentation of financial statements, revenue recognition, nonfinancial assets, and fair market value.

Accounting and reporting standards, revenue recognition, and the approach to reporting non-financial assets are the three main differences between IFRS and U.S. GAAP. IFRS is based on accounting principles, whereas U.S. GAAP is rule based. Implementing IFRS allows companies to better adapt to the changes in the business environment, by not having as many guidelines in order to encourage the use of professional judgment, and in the end, discourage financial engineering. These four aspects of IFRS are believed to produce more transparent financial statements backed by straightforward thinking and flexible interpreting of accounting and reporting standards. This approach encourages a more ethical judgment than following the normal rule based U.S. GAAP. On the other hand, U.S. GAAP focuses on large complex economies that have less room for interpretation and provides a guideline approach to implementation. It is believed that if there are more rules and guidance, then a company does not need to disclose as much within their financial statements. In comparison, U.S. GAAP does not easily allow for thinking outside the box. Many individuals in the U.S. believe that U.S. GAAP should remain the "Gold Standard" because they believe that having a more rules based approach will reduce interpretation and will produce more transparent financial results. Supporters of IFRS believe that business decisions do not rely on rules, but on professional judgment. They believe that failing to disclose the professional judgment within a company's financial statement could misleads investors.

One of the biggest differences involving IFRS and U.S. GAAP, and probably the most difficult standard to convert between the two, is revenue recognition. First, revenue recognition under U.S. GAAP only occurs when it is realized or when earned. Revenue is considered earned when a transaction has taken place between two parties. Under the U.S. GAAP framework, a company can only recognize revenue in the period it was earned, regardless of the time in which they actually receive the revenue. On the other hand, IFRS recognizes revenue in an unusual way. Revenue recognition under IFRS records revenue for that period based on a percentage of completion of all revenue earned. In addition, the guidance of revenue recognition within specific industries exists under U.S. GAAP but not in IFRS. Among the two standards an individual can see where one is rule-based and other is principle in nature.

Another significant difference between U.S. GAAP and IFRS is the approach to reporting non-financial assets; some of which include intangible assets, inventory, property plant, and equipment. IFRS permits the revaluation of certain nonfinancial assets to fair market values, unlike U.S. GAAP, which only permits the use of historical costs. Reporting inventory methods between both practices varies. Last in first out (LIFO) inventory method is allowed to be used under U.S. GAAP but not under IFRS. A company that integrates IFRS and uses LIFO method would have to change to first in first out (FIFO) or weighted average cost and this could have a tremendous impact on reporting operating results and tax implications. IFRS allows for reversals of inventory write-downs for subsequent recoveries; however U.S. GAAP forbids any write-downs for inventories. In addition to inventory write-downs, if an intangible asset loses value under U.S. GAAP it has to be written down and cannot be written back up to the original value. IFRS allows the intangible assets to be written back up. These are some of the constraints and roadblocks that FASB and IASB have to contend with in the coming years.

In conclusion, there are many constrictions in converting U.S. GAAP to IFRS. However, the conversion is needed. The conversion of the U.S. GAAP framework will completely change how companies report their financial results in the coming years. The adaptation from U.S. GAAP to IFRS will create the benefits of stronger comparability and consistency between U.S. and foreign corporations' financial statements. The convergence between the two accounting standards will produce more transparent and understandable standards that will provide a major advantage for investors.

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GAAP and IFRS

Two important methods to be familiar with when it comes to recording financial information are GAAP and IFRS. GAAP stands for Generally Accepted Accounting Principles and IFRS stands for International Financial Reporting Standards. Over the past few years, many countries have made the switch from the GAAP method of accounting principles to the IFRS method. Each of these methods requires CPA firms and corporations to adopt different yet similar principles for recording financial information. The methods state financial standards that companies must follow when recording information on their balance sheets and income statements. Although the United States will eventually undergo the change from GAAP to IFRS, many parts of the world such as the European Union, Australia, South Africa, Singapore, and Turkey have already adopted the IFRS method. More than 113 countries around the world have put the IFRS system into use. The IFRS and GAAP methods have their own set of positive and negative attributes that have affected financial reporting in many countries.

One of the main criticisms of the IFRS method is that it allows unethical managers to hide, change, and choose numbers to make their company appear more presentable. The fact that managers can choose how they wish to present their financial information is one of the main ways IFRS differs from GAAP. The guidelines under IFRS are indistinct and allow managers to change their revenue numbers. Those who support IFRS agree that this method is more lenient when it comes to reporting information; however it is the auditors' job to use their own professional judgment when recording financial information. Although IFRS is said to provide more leeway when reporting for financial statements, there is still no method that will stop unethical managers from changing their numbers.

Matthew Birney, manager of the United Technologies Corporation's financial department stated many positive comments regarding the IFRS method. Birney stated that since there are already so many countries who have adopted the IFRS principles, there are already many experts around the world. The change to IFRS introduces the U.S. business world to many new accountants and talented people. Birney also stated that once everyone is using a single set of accounting standards, like IFRS, it will make access to new capital markets easier. Worldwide adoption of IFRS will benefit investors and accountants using financial statements by decreasing costs of comparing investments and increasing the quality of information. Also under IFRS, more investors will be more likely to provide financing which will benefit many companies.

Many countries have already adopted the IFRS system for various reasons. Each country that has put the IFRS method into use has its own reasoning for adopting the method. For instance, in 2006, the Accounting Standards Board in Canada adopted the IFRS system to try to improve its business. Before IFRS, the GAAP system had been in use for decades in Canada. By switching to the IFRS method, it allows Canada to be more involved with international commerce. The European Union executed the IFRS method to make financial reporting easier among other countries.

Because IFRS is known to allow room for error, the GAAP method may be favored more for its consistency. By operating under the GAAP method, it promotes consistency which decreases the risk for errors. One positive attribute about the GAAP method is that there are strict rules on when and how a company can record their revenue information. Because of this, the chance of error is greatly reduced. Many managers in today's business world are concerned with how their business is presented, so it is essential to have a method that prevents unethical managers from changing numbers. Also, many countries like the U.S. already have practiced the GAAP method for decades so it may be difficult to switch to another method.

Although GAAP has many positive attributes, there are some negative aspects that are important to look at as well. For instance, a negative aspect of GAAP can be portrayed with the environmental crisis. Although our country is currently facing a tough economic crisis, we are also in the middle of an environmental crisis. Issues such as global climate change, water scarcity, and ecosystem degradation not only affect environmental companies, but they also generate financial risks for their investors. The GAAP method ignores these risks which are often a result of unsustainable business strategies. By practicing strong environmental tactics, companies can develop lower costs and increase revenue from new product innovation and increased brand recognition.

In today's competitive business world, it is crucial for countries to choose which method is right for them.

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IFRS Replacing GAAP?

GAAP
Generally Accepted Accounting Principles, also known as GAAP, is an ideology used by accountants in the United States as well as other parts of the world. It was one of the most widely used standards until IFRS had come along, and started mixing its ideas with GAAP. GAAP controlled everything in the accounting world from debit and credit all the way to financial statements. The reason GAAP was so successful was because it was so consistent, everybody used the rules set forth by GAAP. These made it easy for the Securities and Exchange Commission, or SEC, to look into a company's records and financial statements and know exactly where to look for what they needed. GAAP has been dwindling out over the years to make room for a new standard created by International Accounting Standards Board called, International Financial Reporting Standard.

IFRS
International Financial Reporting Standard, or IFRS for short, has been becoming the new standard in the field of Accounting. According to Steve Showerman, of the company of Deloitte, in his article IFRS in the United States: Challenges and Opportunities, over 12,000 public companies in over 100 countries have already switched to IFRS. This includes some companies in the European Union, and other countries such as Canada will be switching over later this year. The United States is slowly moving in the direction of IFRS but that still seems to be off in the long term. The new movement from GAAP to IFRS has caused financial reporting to differ between countries and companies with offices in other countries can wind up paying the price.

What's The Difference?
Generally Accepted Accounting Principles and International Financial Reporting Standard differ in a few ways, such as their financial statements, when taking the CPA exam, test takers will need to recognize and need to perform the different financial statements. Another major difference is in the way that cost is allocated, with GAAP all assets are allocated when doing so to cost. But with IFRS the allocation waits all the way until there is a cost for the product before it breaks down the cost. With International Financial Reporting Standards there is only First-in First-out, weighted average, and specific identification for inventory purposes. This is different from Generally Accepted Accounting Principles because it uses all of these, plus it uses Last-in First-out also, for inventory. IFRS uses a one step method for impairment write-downs, compared to GAAP which uses a two-step method. This makes write-downs more common with IFRS, because it is only one step rather than two.

What does this mean for Accountants?
These differences will affect everyone from students and professors all the way to accountants and experts who have been in the field for years. It will cause accountants to learn new financial statements and will also cause them to either go back to school or learn different techniques on their own. On the CPA exam, accountants will need to remember the old standard, Generally Accepted Accounting Principles, and they will also need to learn and know the new standard, International Financial Reporting Standard. With this CPA test takers will need to realize which standard to use in which circumstances and will need to know the differences between the two standards.

Conclusion
International Financial Reporting Standard is the new standard that is sweeping the globe and according to Janice Patrisso, a partner at KPMG and a leader in the movement for IFRS, the Securities and Exchange Commission has made a compliance date for all companies to move from GAAP to IFRS between the years 2014 to 2016. The SEC had also said that it will comply with the global financial framework. In Why Switch to IFRS From GAAP?, Marquita Jennings explains that on August 27, 2008, the SEC had proposed the idea of making a road map for people to follow while they are switching from Generally Accepted Accounting Principle to International Financial Reporting Standards. And on November 14, 2008 the SEC did just that producing a 165-page document serving as a road map for people while switching from GAAP to IFRS. This will definitely make it easier to make the change when all companies must comply, and people are not really sure what they have to do to switch it to IFRS. Although people are not really sure when the change from GAAP to IFRS is coming, whether it be as early as 2014 or as late as 2016, we can all be sure that the change to IFRS is coming to the United States.

Further Readings

Gornik-Tomaszewski, S, & Showerman, S. (2010). Ifrs in the united states: challenges and opportunities. Review of Business, 30(2), Retrieved from IFRS in the United States: Challenges and Opportunities.

Jennings, M. (2008, December 20). Why switch to ifrs from gaap?. Retrieved from http://profalbrecht.wordpress.com/2008/12/20/why-switch-to-ifrs-from-gaap/

Patrisso, J. (2010). Sec statement provides plan for 2011 decision on ifrs implementation in the u.s. Financial Executive, 26(4), Retrieved from SEC Statement Provides Plan for 2011 Decision on IFRS Implementation in the U.S.

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What to Look For in an IFRS Training Course

All professional accountants, regardless of the area in which they are practicing, need to keep up to date with the developments in the field. International Financial Reporting Standards (IFRS), is one of the most dramatic changes the accounting profession has witnessed in a long time.

There are a large number of seminars, conferences, and courses available to accountants and the list will only get longer as January 1, 2011 deadline approaches. Canada will be adopting IFRS by 2011; the US has not defined an exact date but convergence of US GAAP with IFRS is happening now. How does one choose between the seminars? Part of the answer, like with any other purchase, is cost, but cost is rarely a deciding factor. These days, everyone is busy and there is no greater disappointment than spending a day or two sitting in a class only to find out that time could have been more effectively spent doing something else.

Too many people register for a course just for the sake of taking some training without giving much thought to the specific details. In order to get the most out of an IFRS course, the first step for any participant is to determine he or she wants to learn. The differences between IFRS and GAAP are so substantial that it is not realistic to expect to sit through one or two days of training and become an IFRS expert. After all, it took more than four years of university education to learn GAAP. How would it be possible to learn the equivalent of international standards in just a few days? The more productive route is to first determine which areas of international GAAP you want to focus on and then find the course that offers the most selection in those areas.

If you are a novice to IFRS and want to understand some of the key differences between IFRS and GAAP, then you will want to look for a course that covers at least the following:

Fixed assets

Under GAAP, fixed assets are accounted for at historical cost and then depreciated regularly. Under IFRS, there is a choice of accounting method. Either a company can choose a cost model, which is very similar at the conceptual level to GAAP, or the company can use the revaluation model, a model which regularly revalues assets to their fair value periodically.

Impairments

Impairments are calculated differently under IFRS and GAAP. In Canada and the US, an asset is currently considered to be impaired when its book value is less than the future cash flows the asset expects to generate. Under IFRS, an asset is considered impaired if its carrying value is higher than its recoverable amount. The recoverable amount is defined as the greater of the asset's expected selling price (less costs to dispose) and its value in use, which is defined as the present value of future cash flows expected from the asset. By analyzing the definition of impairment, it is easy to see that impairments will be more likely under IFRS than under GAAP.

Impairment reversals

Under GAAP, once an asset is written down, its value cannot be increased, even if the conditions which caused the impairment reverse themselves. Under IFRS, the reverse is true. Not only are impairment reversals allowed, they are mandatory, should the conditions warrant them.

Cash Generating Units (CGUs)

IFRS has a concept called a Cash Generating Unit (CGU), a term which does not exist in GAAP. The standards define a CGU as "the smallest identifiable group of assets that generates cash inflows from continuing use that are largely independent of cash inflows from other assets or groups of assets." (IAS 36) The concept of a CGU is used for impairment testing. In some cases, it may be difficult to isolate the cash flows from a particular asset from those coming from other assets. Usually in a business, assets work closely together to generate cash flows and it is hard to isolate the cash flows which come solely from one asset. Where assets cannot be tested individually for impairment, CGUs should be tested for impairment and then the assets written down proportionately.

Interest Capitalization

There are some small differences between interest expenses related to the purchases of assets. GAAP allows firms to either expense or capitalize the interest. Many firms choose to expense it immediately. IFRS requires companies to capitalize the interest and in addition, has much more detailed guidance than GAAP on how to do so.

Financial statement presentation

Last but certainly not least, IFRS has a different financial statement presentation than GAAP. In addition, the regulators recently issued a discussion paper which proposes to drastically change the look and feel of the statements from their current state. At first glance, a balance sheet doesn't look like it balances and looks more like a cash flow statement than a balance sheet. Of course, when one looks at the details, it is easy to see that the balance sheet still balances, although not at all in the same format that North Americans are used to seeing. Anyone who enjoys seeing assets balancing to liabilities plus equity on a balance sheet will need to change their expectations. There are also new statements required under IFRS. For example, the Statement of Retained Earnings is replaced by a more detailed Statement of Changes in Equity. In addition, there is a new statement required in the notes to reconcile net income to cash flow.

The above topics present some of the key differences between the two accounting methodologies that anyone seeking an understanding of IFRS should look to for in a course. However, the list above is certainly not comprehensive and there are many other differences which exist. It might also be worthwhile to look for a review of IFRS 1, the standard which describes the rules related to adopting IFRS for the first time. Finally, there are specific issues to various industries, such as oil and gas, utilities, and insurance. The first step in understanding IFRS is to understand the basics. Once that is done, the next step is to understand the particularities as they relate to one's specific industry.

How to make the most of your time in an IFRS course - By Karine Benzacar, MBA, CMA, CPA (Del.)

Karine Benzacar, MBA, CMA, CPA (Del.) (karine@knowledgeplus.org) is Managing Director of Knowledge Plus Corporation (www.knowledgeplus.org), an organization which provides IFRS training across Canada and the US.

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GAAP Vs IFRS Similarities and Differences

As the U.S. market is increasingly going global, with capital providers from other countries, and also many investment opportunities abroad. There is a need for one set of accounting standards for all the companies in this growing global economy. One set of standards would allow companies and individuals to compare financial statements of companies located all over the world. There are two main sets of accounting standards I will focus on. There is US G.A.A.P. the acronym for the (generally accepted accounting principals), and IFRS an acronym for (international financial reporting standards). IFRS is the accounting standard in over 100 countries globally. To help US companies enter the global market, the SEC has to decide to adopt IFRS or to converge GAAP and IFRS. There are many similarities between GAAP and IFRS, and my paper will focus on some of these similarities and differences.

When it comes to financial statements there are many similarities between US GAAP and IFRS, which is a good thing, when converted or adopted financial statements will be pretty much the same for US and international accountants. Under both standards a complete set of financial statements include a balance sheet, an income statement and some sort of statement pertain to non operating incomes and expenses. When preparing these statements, both GAAP and IFRS require them prepared in the accrual basis (expenses and revenues are reported in the period they are incurred) as opposed to the cash basis. Both GAAP and IFRS require companies use the same policies of accounting that they did in the prior year, un less they disclose in their statement any new policies. Also companies are not required to prepare interim reports.

When dealing with inventory both IFRS and GAPP use cost as the basic accounting principal. Both standards have the same definition for inventory. Inventory is assets held for sale in the ordinary course of business or to be consumed in the production of goods or services. Both standards allow different cost method approach like standard cost method and retail method. Also under both standards costs of inventory includes direst materials, direct labor, and overhead, while selling costs and general administrative costs are not included.

There are also some key differences in inventory costing methods. With US GAAP the last in first out or "LIFO" method is an acceptable method, under IFRS it is not. Under IFRS the same cost formula must be applied to all inventories. With GAAP inventory is valued at lower cost or market cost. While under IFRS inventory can also be carried at lower of cost, or it can be priced at net realizable cost. Under GAAP inventories can't be written-down, under IFRS inventories are allowed to be written down under pre-determined circumstances.

The definition of long lived assets is similar under both US GAAP and IFRS. They both roughly define long lived assets as tangible assets held for use, to be used for more than one accounting period. Long lived assets are depreciated in GAAP and IFRS

Both GAAP and IFRS have a section for extraordinary items listed on the income statement. Extra ordinary items are material gains or losses that are both unusual and infrequent and not part of a company's continuing operations. Extraordinary items can vary by industry and region. With GAAP these extraordinary items are separately listed, while IFRS puts them with all the other gains and losses included with operations.

Property plant and equipment is treated similarly under GAAP and IFRS but not exactly the same. Both of their definitions state that property plant and equipment as a tangible asset, held for the use of producing or storing goods, or for rental to others, or for administrative purposes. They are expected to be used for more than one accounting period. They both value these assets at their initial cost and can use the same deprecation methods. Under GAAP the historic cost principal is applied, the value of these assets remains the same over their life. On the other hand with IRFS these assets can be re valued at year end if there is a material change in market cost. When the assets value is changed under IFRS the deprecation will have to be recalculated with the new value of the asset.

There are many obstacles to overcome to merge GAAP and IFRS or to just simply adopt IFRS, but it needs to be done. The differences create barriers to do international business. The inability to accurately compare and analyze financials of companies that use US GAAP and those who use IFRS slows down globalization. Investors and individuals will not seek to do business internationally, that is why one set of uniform standards is needed.

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