Are IFRS and GAAP Converging?

Generally Accepted Accounting Principles (GAAP) is the current accounting standards that public companies in the United States are required to follow since the mid 20th century. GAAP was issued by The American Institute of Certified Public Accountants and is currently enforced by the Securities and Exchange Commission (SEC). These rules are enforced in order to ensure that all financial statements and reports are free from manipulation, are accurate, consistent, and relevant. GAAP assumes that business is separate from its owners. Revenues and expenses should be kept separate from personal expenses. It is assumed that a business will operate indefinitely and that stable currency (the US Dollar) is going to be the unit of record. GAAP also assumes economic activities of an enterprise can be divided into time periods. Generally Accepted Accounting Principles are accounting rules that are used to prepare, present, and report financial statements and follows the cash basis of accounting

International Financial Reporting Standards (IFRS) are principle based standards that were issued by the International Accounting Standards Board after 2001. IFRS uses the accrual basis of accounting. The accrual basis of accounting assumes that revenues are recognized as they occur as opposed to when cash is actually gained or paid. Also International Financial Reporting Standards assumes that an entity will continue in operation until a foreseeable future. Financial capital maintenance is in nominal monetary units or traditional historical cost accounting, but financial capital maintenance is in units of constant purchasing power during low inflation and deflation. International Financial Reporting Standards, like Generally Accepted Accounting Principles is followed to ensure reliability, relevance, and comparability of financial reports and statements.

IFRS and GAAP differ. GAAP is rule-based and IFRS is principle-based. "The IFRS must follow LIFO when recording inventory, where GAAP allows a choice between LIFO and FIFO" (Wall 1). IFRS does not segregate extraordinary items on the income statement like GAAP does, and the earnings per share do not average the individual interim period calculations under IFRS rules. Earnings per share do average the individual interim period calculations under GAAP (Wall 1). These differences affect the decisions the SEC are currently facing due to globalization in the market.

The market today is becoming globalized. Due to this globalization, the United States market has been expanding to an international level. "As the United States businesses move towards a global economy, there is a need to move towards global accounting standards" (Hansen 15). Over one hundred countries have already adopted IFRS rules, and many are in the process of adopting them (Hansen 16). Eventually, all countries will follow the same standards.

In my opinion, IFRS should and will eventually be adopted. IFRS was supposed to be put into place during late 2012, but it is has been pushed back to a later date. In my opinion, it will be adopted within the next two years. I believe that due to globalization, IFRS should be adopted because it is a universal standard. Accounting is like a "language" of business. This means that if every country eventually adopts IFRS, they will all be speaking the same "language."

The SEC has many concerns about becoming international and making changes to GAAP (Leone 22). Some concerns of the Securities and Exchange Commission include a fear of affecting revenues and customer loyalty programs, affecting effective tax rates, and affecting company's capital needs. GAAP and IFRS recognize revenues differently which is an issue. I also believe that the biggest concern and challenge will be accounting for revenue. IFRS will drastically change revenue recognition.

IFRS also lets companies take advantage of declining costs, allows profit-boosting reversals, and makes the cash flow statement harder to evaluate because interest expenses appear in different places than GAAP cash flow statements. Because of the many concerns, the movement from GAAP to IFRS or the convergence of the two is happening very slowly (Leone 26).

Many larger multinational companies in the United States are welcoming these changes because the IFRS standards are nearly in every other country that they operate in anyway. These larger companies believe that the United States would benefit from the convergence to international rules. I, again, also believe that IFRS will benefit the United States because of globalization and being able to do business with other countries much easier because most of them already have adopted and follow IFRS standards. "IFRS standards will improve comparability between United States and non-US reporting companies" (Hansen 15). Movements towards international accounting rules will only mostly negatively affect smaller United States companies. Small companies believe the switch will be costly and that they will get little or no benefit from it. I also believe one of the main problems may be small businesses going out of business.

The United States is currently moving towards IFRS standards. The SEC and FASB is currently thinking of ways to incorporate international rules into the currently used US Generally Accepted Accounting Principles. The Securities and Exchange Commission has been monitoring the slow convergence and they are trying to take key elements from the IFRS to incorporate them into GAAP. In my opinion, the United States should adjust the IFRS standards. Other countries have done the same. This way, the United States can make the standards work for the needs of the businesses within the country. IFRS can be adjusted to fit the culture and needs of a country. I believe that the SEC should also slowly converge. One standard at a time will allow businesses to make the adjustments with more ease.

"Generally Accepted Accounting Principles may not necessary be replaced, but IFRS rules will supplement GAAP rules" (Wall 1). GAAP and IFRS rules will hopefully harmonize into a single set of Global Accounting Standards. The SEC hopes for prosperous, stable economy that will follow the new set of converged rules. In my opinion, I believe that it is a matter of time before IFRS is adopted and that it is inevitable that the standards will be put into place.

Hansen, F. (2008). Kiss GAAP goodbye. Workforce Management, 87(15), 16-17. Retrieved from EBSCOhost

Leone, Marie.(2011). IFRS Still Not Ready for the US.

Wall, K. (2010). Implications of the Convergence of International Financial Reporting Standards and Generally Accepted Accounting Principles. Conference Papers -- Law & Society, 1.

Article Source: http://EzineArticles.com/?expert=Melissa_A_Mann

Article Source: http://EzineArticles.com/7170946