Currently, the United States' firms use GAAP for standard accounting procedures. As technology grows, and the world becomes smaller many nations believe that a global accounting procedure would be beneficial for everyone. Many nations have already adopted international financial reporting standards, but it is still controversial as to which system will provide the most accurate accounting practices.
The US Generally Accepted Accounting Principles, GAAP, is a very particular and thorough rules based system that provides a detailed guidance on how an entity should behave, and report its earnings. This system provides a detailed set of instructions on how businesses should report their financials based on the forms, not on the substance of what is being reported. "The goal of GAAP is accordance with GAAP," and failure to comply with the set standards will result in legal ramifications (Phillips 612).
International Financial Reporting Standards, IFRS, is a principles based system that provides an entity with a broad direction, but allows the flexibility to choose a course of conduct. "The goal of IFRS is to give a fair view of a company's financial position," and this often times requires management to make judgment calls, assumptions, and estimates of what it should report (Phillips 620). The IFRS "increases comparability between companies around the world, which ultimately reduces the cost of capital" (Castaldo). The European Union is already using the IFRS accounting procedures to simplify the ability to compare firms internationally.
IFRS is often criticized because it is easier to commit accounting fraud under this system than under GAAP. Also, there is a high expected implementation cost for all entities. The companies will lack expertise with the system, and auditors will have difficulties accepting conflicting policies of companies within the same industry. The users of the financial information will then lack confidence and knowledge with the new system, which will result in more training costs so that they can properly analyze the information. Schooling is another concern; the entire accounting curriculum would have to change.
Revenue recognition, uncertain tax positions, and consolidation of special-purpose entities are three major concerns the experts have regarding IFRS. Under IFRS it is understood that revenue only needs to be recognized when risk is transferred. There is only a broadly stated directive with very little micro regulation. This leaves many experts uneasy since GAAP has a very detailed four factor test on revenue recognition, and a lot of regulation. Also, the IFRS does not address uncertain tax positions as specifically as it should; tax positions are adjusted as seen fit or disregarded. This causes a problem for experts since tax provisions can have such a significant effect on a company's financials. GAAP however does provide strict guidelines for tax provisions. Lastly, special purpose entities, SPE's, "are commonly used only as a method of keeping debt off of the balance sheet of the sponsor company" (Phillips 622). GAAP requires that the financial statements of the SPE be included with the sponsor company's financials unless a series of specific requirements are met. IFRS only requires the SPE's financials be included if the SPE is under the sponsor company's control; there is a specific set of requirements for control, but it is still much up to the manager's discretion.
While IFRS has many benefits concerning international accounting comparability there are a number of legitimate concerns by the experts. There are very high implementation costs, a high risk for fraud, and a great amount of room for error considering the amount of leeway given with reporting. As the world becomes smaller, and international business is becoming more common it is necessary to have some sort of common accounting reporting to simplify the decision process for businesses when looking for international business partners. While GAAP works well for the United States, and works hard to try to prevent fraud this may no longer be the best method.
The IFRS could be the best method of accounting procedure if there were more specifications made. Revenue recognition needs to have higher standards so there is no question as to when it needs to be recorded. This would help fight accounting fraud. Also, individual industries need to be sure all companies follow the same standards. Since there is so much freedom with reporting under IFRS individual industries need to be sure the companies' financial statements are comparable. One of the biggest issues with IFRS is the lack of specification with reporting tax provisions; this will cause a significant discrepancy with financial statements.
Since the United States deals so much with international business IFRS should be implemented in this country. Implementation needs to be done carefully though to avoid confusion by users, auditors, educators, and students.
Castaldo, Joe. "Accounting for Trouble?." Canadian Business 84.1/2 (2011): 15-16. Academic Seach Complete. EBSCO. Web. 15 Feb. 2011.
Phillips, Lance J. "Implications of IFRS on the Functioning of the Securities Antifraud Regime in the United States." Michigan Law Review. 108.4 (2010): 603-631. Academic Search Complete. EBSCO. Web. 15 Feb. 2011.
"US GAAP & IFRS Convergence." PricewaterhouseCoopers LLP. 2008-2011. 15 Feb. 2011. Http://www.pwc.com/us/en/issues/ifrs-reporting/ifrs-gaap-convergence.jhtml.
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