For those who know anything about the accounting field know that when dealing with international business there is always one major problem. This problem is the discrepancies in dealing with Generally Accepted Accounting Principles in the United States and International Financial Reporting Standards in other countries. These two systems contain many differences that cause problems for accountants. Many professionals believe that United States GAAP is the better system of the two. Del Rush, a partner with Frost, PLLC, a group of certified public accountants, discussed the differences between GAAP and IFRS. He said, "Because GAAP is rules-based, what you'll find is that if you were to print all the U.S. rules, the standards would probably be four times as lengthy as the IFRS standards" (Barron). This shows that GAAP looks more thorough than IFRS which Rush claimed was more principles-based.With the lack of uniformity on a global basis, U.S. companies who wish to extend their business internationally will run into a variety of problems because of the varying standards. I will highlight a few of the major differences between the two systems and the problems that these differences cause.
One significant difference between these two systems is that GAAP uses the historical cost principle, whereas IFRS uses fair-value. Generally, it is easier to use historical cost for most reporting situations than it is to use fair-value. When using fair-value to evaluate what number to report, calculations must be made to figure out the market value of the object. In some situations it is difficult to judge what exactly that value should be which means some discretion exists. When discretion is used in accounting practices numbers can be manipulated more easily. Manipulated numbers cause problems because they are usually inaccurate and tend to reflect the business entity in the most positive way possible. In the business world, it is important that financial statements accurately reflect the company's economic position. It becomes very dangerous for investors when companies do not accurately report their true financials.
One of the most impactful differences is that GAAP allows the use of the last in first out method when dealing with inventory, but IFRS does not allow the use of LIFO. The problem this causes is that companies that record their inventory using LIFO have to revalue their inventory which could create some tax liabilities, as well as becoming very time consuming. As GAAP and IFRS try to find middle ground, there has been a recent creation of the "LIFO Conformity Rule." Michael J.R. Hoffman explains, "That's the tax rule permitting use of the Last-in, First-out (LIFO) inventory method for tax purposes, but only if it is also used for financial reporting purposes" (Hoffman). U.S. companies currently using the LIFO method are reluctant to adjust to IFRS for this very reason. Inventory write-downs are also different under both systems. IFRS allows write-downs however; U.S. GAAP does not allow any write-downs for inventory.
Another difference between United States GAAP and IFRS is what is called revenue recognition. Revenue recognition deals with when and how revenues are financially reported. Under U.S. GAAP, there are specific guidelines about what should be considered revenue, how it should be measured and when exactly it should be reported. Conversely, IFRS's standards when it comes to revenue are not as thorough about when it should be reported. With looser guide lines in IFRS, it opens up for interpretation. This can lead to companies reporting higher revenue than those under more specific revenue standards. U.S. GAAP also provides clearer insight to specific industries whereas IFRS lacks industry specific guidance.
With these evident differences the need for a consolidated system of accounting standards becomes clearer. It seems the world is moving towards developing one set of rules, but these various differences present a challenge for which there is no clear answer. In some way all companies will have to change their books to adapt to the new set of rules. It remains to be seen what these rules will demand, but having uniform standards will present many long-term benefits to everyone.
Works Cited:
Barron, Jacob. "The Endless Switch From GAAP To IFRS." Business Credit 113.8 (2011): 4-6. Business Source Premier. Web. 27 Nov. 2012.
Hoffman, Michael J. R., and Karen S. McKenzie. "Speed Bump Or Barricade?." Strategic Finance 91.1 (2009): 34-39. Computers & Applied Sciences Complete. Web. 27 Nov
Article Source: http://EzineArticles.com/?expert=Jason_T_Showalter
http://EzineArticles.com/?A-Uniform-Code:-GAAP-Vs-IFRS&id=7398611
No comments:
Post a Comment