US GAAP Vs IFRS

Both the Financial Accounting Standards Board and International Accounting Standards Board have declared their willingness to converge International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP). With companies engaging in business all over the world, it makes sense that there would be one set of accounting principles to be followed. The current complexity of U.S. GAAP has made it difficult for companies to accurately abide by all of the regulations. The convergence of IFRS and U.S. GAAP should be a good thing for all businesses and should simplify the process of financial reporting.

What exactly is GAAP? U.S. Generally Accepted Accounting Principles are accounting regulations used to prepare, present, and report financial statements for all types of companies in the United States. On the other hand, the goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements. As of now, approximately 120 nations have adopted IFRS and require it for their domestic companies. The Securities and Exchange Commission has stated that it believes the United States will convert to IFRS by 2014; however, this date is subject to change (E&Y, 2009).

There are many similarities and differences between GAAP and IFRS. One big similarity between the two relates to financial statement presentation, both GAAP and IFRS require a balance sheet, income statement, other comprehensive income for US GAAP or statement of recognized income or expense for IFRS, along with a statement of cash flows and notes to the financial statements. Also, both require that the financial statements be prepared on an accrual basis. One difference when it comes to financial presentation is that U.S. GAAP requires companies to report expenses based on function, whereas IFRS allows companies to report expenses either by function or nature. However, if function is selected than the company must include certain disclosures about the nature of the expenses in the accompanying notes. Other big differences between U.S. GAAP and IFRS is that IFRS does not allow extraordinary items to be reported on its income statements nor does it permit Last In, First Out (LIFO).

IFRS is intended to be a more principles-based set of standards rather than the rules-based approach of U.S. GAAP (2007, Gill). IFRS currently has over 2,000 pages of accounting regulations, whereas the U.S. GAAP is made up over 2,000 pronouncements, in which some of these pronouncements are several hundred pages long. By simply looking at the significant difference in numbers, one can easily conclude the U.S. GAAP is much more detailed than its counterpart IFRS. IFRS standards tend to be broader than U.S. GAAP principles. Therefore IFRS standards allow for more interpretation.

Convergence efforts by themselves will not completely eliminate the differences between GAAP and IFRS. There are currently still differences in certain standards where the convergence has already taken place and unless the words of the standards are completely changed, interpretational differences will still exist. The success of a consistent set of global accounting standards also will depend on national regulators and industry group's willingness to refrain from giving their interpretations on IFRS principles, that ultimately will provide them with exceptions from the IFRS principles (2009, E&Y).

Many believe that IFRS is easier to use than U.S. GAAP and that it will result in better reporting. There is no doubt that IFRS will save money for those companies who have gone global because they will no longer have to spend money doing two sets of books. Not only will IFRS save global companies money, but also by having one accepted set of standards will allow for greater comparability. However, some skeptics believe that the costs associated with adopting IFRS will outweigh the benefits.

Regardless of whether or not one believes in the convergence of IFRS with U.S. GAAP, it is happening and it is just a matter of time before it is completed. With companies engaging in business globally, the convergence of IFRS with U.S. GAAP should improve the financial statements for global investors. Now all business around the world will have the same set of standards to follow, which will clear up any confusion when it comes to comparing one company's books to another's. IFRS and U.S. GAAP have the same basic underlying principles, which should make the convergence smoother, and allow for an easier transition for all companies, when it comes to adopting the new set of standards.

1. Gill, Lawrence M. "IFRS: Coming to America." Journal of Accountancy. Web. 20 Oct. 2010.
< http://www.journalofaccountancy.com/Issues/2007/Jun/IfrsComingToAmerica.htm >.

2. IFRS and US GAAP-similarities and differences. Publication. PricewaterhouseCoopers,
2009. Print.

3. US GAAP vs. IFRS The Basics. Publication. Ernst & Young, 2009. Print.

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