Currently, over 100 countries use the International Financial Reporting Standards (IFRS) as protocol for their accounting standards within financial statements. The system, set forth by the International Accounting Standards Board, is not followed by all countries however. The United States for example, is not one of these countries. The United States currently follows Generally Accepted Accounting Principles (GAAP). This system, established by the Financial Accounting Standards Board (FASB), has some similarities to IFRS. However, the differences (and conversion from GAAP to IFRS) between the two systems has caused concerns from parties at a corporate and academic level. Currently, the United States has a proposed a deadline of 2014 for conversion from GAAP to IFRS. In this small time frame, many questions and complications must be alleviated to ensure a smooth transition. In the following article, I will lay out these complications, with possible solutions.
One party that will be affected by a GAAP to IFRS transition in the United States is publicly traded companies. First, a major difference that will have an effect is the differing protocols for each system. GAAP is historically known for specific rules that each company adhere to and report to the U.S. Securities and Exchange Commission. For instance, GAAP allows for the last in, first out method (LIFO) for inventory costing. Conversely, IFRS does not allow for this method. This difference has large tax implications for United States companies. Currently, United States companies using LIFO to value their inventory enjoy the benefit of lower taxes. An elimination of LIFO will cause these companies to revalue their inventory at a higher amount, and possibly suffer a tax increase. Second, a large difference between GAAP and IFRS relates to how companies will be able to value their long term assets. IFRS allows companies to value their long term assets, such as property, plant, and equipment, at fair value. GAAP, on the other hand requires companies value these assets at book value. This asset measurement technique difference has the potential to create vastly different financial ratios for companies. In turn, these different asset values and ratios can greatly change investor's sentiments about the strength of a corporation. These complications are not affixed to only corporations however. Academically, professors, students, and recent graduates will face many of the same problems.
On an academic level, most accounting students in the United States spend their collegiate years preparing themselves for the Certified Public Accountant (CPA) exam. The CPA exam's basis is GAAP, and does not include the differences of IFRS. A conversion to IFRS would require these students and current CPA's to extend and alter their current education, and possibly require them to be recertified. This not only causes problems for the student, but also the Universities and professors teaching the curriculum for the CPA exam. A change to IFRS would require these institutions to revamp all of their accounting course offerings. In addition, professors would be required to extend their current education to better teach the new accounting standards. Not only would this be a headache academically, it would be costly and cumbersome. Changing an entire professions way of operating requires a large amount of effort that would most likely take several years to perfect.
The large differences in the transition to IFRS from GAAP are an obvious concern for many parties in the United States. Conversely, the transition would establish a point of uniformity for corporations in an ever expanding global marketplace. In order to achieve a smooth conversion it's important for all levels involved to communicate efficiently. For instance, organizations such FASB and the SEC must communicate all changes that will occur in a precise manner to avoid a grey area of interpretation. By making the new protocol for financial accounting standards transparent, these organizations will lay a groundwork that can be followed in the corporate world and academically. Achieving this transparency requires time and thoughtful effort. The rewards of the effort will help to educate new CPAs, corporations, and achieve a global standard for accounting practices.
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