Change From US GAAP to IFRS

In this current world economy there are many business transactions that cross international borders. The regulations governing these business transactions are different depending on what countries are involved. The fundamental accounting principles do not change but the specific rules and regulations vary accordingly. The main regulating bodies are the U.S. Generally Accepted Accounting Principle (GAAP) and theInternational Financial Reporting Standards(IFRS). Many companies and some countries are making the necessary changes to the way they do business in order switch to IFRS or create a similar system to IFRS.

In the U.S. the Securities and Exchange Commission (SEC) has been debating whether or not to consider the change from GAAP to IFRS since 2002. International companies were allowed by the SEC to follow IFRS and no reconciliation to GAAP. That regulatory decision was in 2008 so it was a sign that the SEC is considering a change. By establishing this precedent for international companies allows them to follow both set of accounting rules without requiring reconciliation to GAAP; this puts domestic U.S. firms at a competitive disadvantage. In response to this many U.S. companies expressed a desire to switch to IFRS before such a change is legally mandated or permissible. Even though there are significant differences between GAAP and IFRS many accounting experts believe over the past 10 years the two regulatory regimes have been brought into closer alignment with each other.

IFRS is required to be used by the corporations whose home nation state is a member of the G-20, which includes the United States. IFRS demands more transparency than GAAP. It requires any compliant company to disclose accounting policies, judgments and estimates, as well as additional qualitative and quantitative information related to significant accounting transactions. Making all of these requirements mandatory the IFRS is more complex but it is also harder to hide an accounting error as untraceable. IFRS is not just specifically for accounting regulating even though accounting falls under the three categories which are accounting policies and procedures, contractual agreements and covenants and management incentives and compensation linked to financial reporting. The change for U.S. businesses from GAAP to IFRS will cause the current accounting rules and regulations would be reviewed to see how far off they are from IFRS. One of the GAAP differences with IFRS would be the way organizations account internally on their financial reporting. That will trigger a major decision by high ranking accounting officials making judgment calls on the array of potential solutions that will best for the company involved.

With profound changes to your accounting regulations your current practice will be affected. Many business people may want to change the system but it will hard to adjust. In GAAP it defines revenue differently than IFRS would. In GAAP there is over 100 different pieces to define revenue while IFRS is more of a guideline. That can cause some eyebrows to be raised because if there is only a broad guidance and little application of specific detailed instruction. Not having a more concrete rule can make things easy to manipulate and obfuscate. On the other hand the IFRS has worked for many other nations so less rules to confuse an accountant because he or she does not have to look to see their company is meticulously abiding by each aspect of each rule but addressing the spirit of the each rule. All the differences will not matter if the people in power disagree on how to make the changes.

Last year the U.S. rejected adoption of IFRS. It was hoped to have IFRS standards replace U.S. GAAP by Christmas of 2011, however sadly it failed to happen. The chairman Hans Hoogervorst IASB and Leslie Seidman chairman FASB were disputing whether the name should remain U.S. GAAP. Also, Seidman also wanted to give the United State the right to create the standard. With these hold ups it will make observers wonder what is true reason why the United States has not adopted IFRS. Multinational companies are impacted the greatest since they need to do business in the United States you must follow U.S. GAAP, beyond the U.S. border IFRS and whatever accounting rules that is native to the specific foreign nation apply.

The U.S. GAAP and IFRS both discourage illegal activity. The change is coming not as fast enough for the interested parties. If the change came very quick however, red flags would be raised because it is human nature to maintain the status quo and suspect hidden wrong doing in the process. Business men and woman in the world will have to hope and pray that this long delay is going to produce a system that will facilitate doing business transactions internationally. Your guess is as good as mine to determine when U.S. GAAP and IFRS will match or have a new system that will be better than the two current accounting rules; all I can say is stand by and expect the unexpected.

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