Separate from other countries, the United States has always followed its own way of doing things. For example, the U.S. was the only country to have a uniform color for their currency; green. However, other countries color-code their currency to differentiate their denominations. Our green colored dollar bill originated back since the nineteenth century and up until the 2000's, we are now beginning to see American bills with multi-colored ink. Up until the 2000's, the United States was stuck in its own ways and comfortable with their consistent green currency until they realized printing with multi-colored ink would help differentiate their bills; all while other countries recognized this long before. Just as the United States had their own way of presenting our currency, the same goes for setting our accounting standards. The U.S. has followed Generally Accepted Accounting Principles, or GAAP, as their means for presenting financial statements, while other countries follow the International Financial Reporting Standards, or IFRS. Historically, the United States has been the most adamant about maintaining its own U.S. GAAP, however recently the Security Exchange Commission (SEC) has agreed to the adoption and the execution of the IFRS in the U.S. The SEC has recognized the outweighed benefits associated with using equivalent accounting standards among all countries despite the differences between the two.
While more and more businesses are transitioning to a global economy, by adopting IFRS, all businesses worldwide will present financial statements on the same basis and foundation. This, in turn, will give U.S. businesses a competitive advantage with its foreign competitors since equivalent disclosure of companies' financial performance will be more comprehensible and easier to compare to investors, businesses, and the general public. As indicated by Professor David Albrecht, "If every country has a different set of financial standards, while multinational companies exist in different countries, it is difficult to compare how each company stands because there is no consistency. Consistency is a key factor in comparing statements". IFRS will also make it easier for companies to initiate partnerships, implement cross-border acquisitions, and develop cooperation agreements with foreign entities. Also, companies with subsidiaries in countries that either require or permit IFRS may be able to use one accounting language company-wide. Companies also may need to convert to IFRS if they are a subsidiary of a foreign company that must use IFRS, or if they have a foreign investor that must use the international standard. Another apparent benefit of adopting this is that companies will have the advantage of increasing capital overseas. All of these advantages, in addition to many others, will tremendously assist in a company's overall position and performance in the global economy.
Although the switch to IFRS will be beneficial for U.S. companies, some people believe the switch will leave the U.S. at a disadvantage because of the many differences between our current accounting principles and IFRS. To be clear, U.S. GAAP is a codification of how CPA firms and corporations prepare and present their income, expenses, assets, and liabilities on their financial statements. It is not a single accounting rule, but is rather the accumulation of many rules on how to account for various transactions. When preparing financial statements using GAAP, most American corporations and other business entities use the many rules of how to report business transactions based up these various GAAP rules. The rules and procedures for reporting under GAAP are complex which have developed over a long period of time. On the other hand, the IFRS is considered a "principle based" set of standards in that they establish broad rules as well as dictating specific treatments.
There are specific differences in the two accounting standards. According to the IFRS website, the most significant difference between U.S. GAAP and IFRS is that IFRS provides much less overall detail. For example, its guidance regarding revenue recognition is considerably less extensive than U.S. GAAP. IFRS also contains relatively little industry-specific instructions. Also, IFRS does not permit Last In, First Out (LIFO); the only acceptable method to account for inventory is First In, First Out (FIFO). IFRS also uses a single-step method for impairment write-downs rather than the two-step method used with U.S. GAAP, which makes write-downs more likely. The IFRS also does not permit debt for which a covenant violation has occurred to be classified as non-current unless a lender waiver is obtained before the balance sheet date. To note some other differences, U.S. GAAP acquires intangible assets recognized at fair market value. On the contrary, IFRS recognizes intangible assets if they are likely to have future economic benefit and are measured according to their reliability. Additionally, U.S. GAAP allocates costs to individual assets while IFRS's initial measurement is simply at cost (International Financial Reporting Standards).
From an overall standpoint, it is my belief that the U.S. GAAP is calibrated to handle financial situations at the present moment and that the IFRS is more geared to focus on everything, leaning more to a better financial future. I believe that despite these differences, the U.S. will greatly benefit when we adopt an international set of accounting procedures. Just as the U.S. is now following other countries in respect to differentiating currency, I believe now is the appropriate time to follow other countries and adopt internal accounting procedures.
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