Two important methods to be familiar with when it comes to recording financial information are GAAP and IFRS. GAAP stands for Generally Accepted Accounting Principles and IFRS stands for International Financial Reporting Standards. Over the past few years, many countries have made the switch from the GAAP method of accounting principles to the IFRS method. Each of these methods requires CPA firms and corporations to adopt different yet similar principles for recording financial information. The methods state financial standards that companies must follow when recording information on their balance sheets and income statements. Although the United States will eventually undergo the change from GAAP to IFRS, many parts of the world such as the European Union, Australia, South Africa, Singapore, and Turkey have already adopted the IFRS method. More than 113 countries around the world have put the IFRS system into use. The IFRS and GAAP methods have their own set of positive and negative attributes that have affected financial reporting in many countries.
One of the main criticisms of the IFRS method is that it allows unethical managers to hide, change, and choose numbers to make their company appear more presentable. The fact that managers can choose how they wish to present their financial information is one of the main ways IFRS differs from GAAP. The guidelines under IFRS are indistinct and allow managers to change their revenue numbers. Those who support IFRS agree that this method is more lenient when it comes to reporting information; however it is the auditors' job to use their own professional judgment when recording financial information. Although IFRS is said to provide more leeway when reporting for financial statements, there is still no method that will stop unethical managers from changing their numbers.
Matthew Birney, manager of the United Technologies Corporation's financial department stated many positive comments regarding the IFRS method. Birney stated that since there are already so many countries who have adopted the IFRS principles, there are already many experts around the world. The change to IFRS introduces the U.S. business world to many new accountants and talented people. Birney also stated that once everyone is using a single set of accounting standards, like IFRS, it will make access to new capital markets easier. Worldwide adoption of IFRS will benefit investors and accountants using financial statements by decreasing costs of comparing investments and increasing the quality of information. Also under IFRS, more investors will be more likely to provide financing which will benefit many companies.
Many countries have already adopted the IFRS system for various reasons. Each country that has put the IFRS method into use has its own reasoning for adopting the method. For instance, in 2006, the Accounting Standards Board in Canada adopted the IFRS system to try to improve its business. Before IFRS, the GAAP system had been in use for decades in Canada. By switching to the IFRS method, it allows Canada to be more involved with international commerce. The European Union executed the IFRS method to make financial reporting easier among other countries.
Because IFRS is known to allow room for error, the GAAP method may be favored more for its consistency. By operating under the GAAP method, it promotes consistency which decreases the risk for errors. One positive attribute about the GAAP method is that there are strict rules on when and how a company can record their revenue information. Because of this, the chance of error is greatly reduced. Many managers in today's business world are concerned with how their business is presented, so it is essential to have a method that prevents unethical managers from changing numbers. Also, many countries like the U.S. already have practiced the GAAP method for decades so it may be difficult to switch to another method.
Although GAAP has many positive attributes, there are some negative aspects that are important to look at as well. For instance, a negative aspect of GAAP can be portrayed with the environmental crisis. Although our country is currently facing a tough economic crisis, we are also in the middle of an environmental crisis. Issues such as global climate change, water scarcity, and ecosystem degradation not only affect environmental companies, but they also generate financial risks for their investors. The GAAP method ignores these risks which are often a result of unsustainable business strategies. By practicing strong environmental tactics, companies can develop lower costs and increase revenue from new product innovation and increased brand recognition.
In today's competitive business world, it is crucial for countries to choose which method is right for them.
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