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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Convergence With IFRS - Initial Steps

The world over, there is much talk on IFRS and convergence of local GAAP to IFRS. The SEC in 2007 abolished the requirement for the foreign companies from providing a reconciliation statement between their financial prepared under IFRS to financial in US GAAP. Thus, the SEC made a major statement in 2007 itself that foreign companies listed in the US need not convert their IFRS prepared financial to financial confirming to US GAAP.

The first foreign company in US to file its financial without a reconciliation to US GAAP is Novartis AG when it submitted its Form 20-F on January 28, 2008.

There has been much buzz since then about IFRS and convergence of US GAAP with IFRS as issued by IASB. This buzz is synonymous with the buzz that was created when the Sarbanes Oxley Act (SOX) was made mandatory in US in 2002.

Its a known fact that the industry heavyweights in US would have to start reporting their financial under IFRS from 2014 onwards. And once that is done, it would be sooner than later that IFRS mandated financial would become the norm of the day for all the listed companies.
Now that we have understood the importance and the implication of IFRS in US, let us now understand how would companies approach this new mechanism.

Since its a new concept, it would be better to involve professionals like Indian CPAs, who would already have experienced the transition process (since India is moving to IFRS in 2011) and would have a 3 years experience in reporting under IFRS.

The transition to IFRS would first need to be broken into 3 steps:

1. Initial Stage:- The professionals would need to understand the business as the first step towards transitioning to IFRS and then define the scope of the work as well as define time period for the process.

2. Planning Stage:- In this stage, the professionals would need to

(a) Clearly define the limitations in the business
(b) Select the team for enabling a smooth transition
(c) Study the transactions in detail to understand the implications

3. Execution Stage:- This is the crucial stage of actual execution of the process and would involve

(a) Preparation of checklists by the professionals
(b) Interviews and discussions with the concerned individuals controlling the
specific processes3
(c) Documentation of the transactions under IFRS
(d) Reporting the financial under IFRS
Although it sounds very easy, the transition will not be very easy process and companies need to be alert and cautious while going in for such a step.

The IFRS 1 states that:

(a) An entity's first financial statement under IFRS would be the statements prepared under IFRS.

(b) An entity shall prepare an opening IFRS balance sheet at the date of transition to IFRS. This would

be starting point for the entity's accounting under IFRS.
(c) Such opening IFRS balance sheet need not be presented in its first IFRS financial statements.

(d) While preparing the opening IFRS balance sheet, an entity shall:
- recognize all assets and liabilities whose recognition is required under IFRS.
- not recognize such assets and liabilities as are not permitted by IFRS.
- reclassify those items that were recognized under local GAAP as one type of asset/liability/equity, but are a different type of asset/liability/equity under IFRS.
- apply IFRSs in measuring all recognized assets and liabilities.

It would be pertinent to note that IFRS grants limited exemptions from the above requirements in specified areas if the cost of compliance would most likely exceed the benefits therefrom.

Also, the IFRS prohibits the retrospective application of IFRSs in some areas, particularly if the retrospective application would require judgment by the management on past condition whose outcome is already known.

IFRS also requires the entity mention how the transition from previous GAAP to IFRS affected the entity's reported financial position, financial performance and cash flows.

With so much requirements and so much at stake, it would only be wise to seek help of experienced professionals in transitioning to IFRS.
India would be converging to IFRS by 2011 and that means Indian CPAs who would have at least 3 years of experience in reporting under IFRS; businesses in US have a very nice choice to opt for when they transition to IFRS.

Steve is a qualified accountant (Indian CPA) and co-founder of APT Services, the fastest growing outsourced accounting service provider in India. Steve has over 10 years of expertise in audits, accounting (both US & Indian GAAP), payroll and tax preparation services. For details on services provided by APT Services, log onto [http://www.aptservicesonline.com]

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IFRS - New King of American Accounting?

Introduction

The International Financial Reporting Standards, commonly referred to as IFRS, is emerging as the dominant global accounting model. Traditionally, the United States has been the worldwide model for accounting procedure with their use of GAAP (Generally Accepted Accounting Principles). Today, more than 100 countries worldwide accept IFRS as their primary accounting standards or permit its use. This trend has led to much speculation about whether or not the United States will move away from their traditional use of GAAP and also adopt IFRS for its accounting guidelines. This would have a tremendous impact on American businesses as well as accountants, financial planners, and investors in the United States and abroad.

Adoption of IFRS

Many experts speculate the United States is on track to switch to IFRS as early as 2014. Ultimately, the SEC, government, and FASB (Financial Accounting Standards Board) are the controlling powers as far as the adoption of IFRS. Some large multi-national corporations with foreign subsidiaries have begun using IFRS. The FASB has stated that it will include IFRS questions on their CPA exams starting in 2011. Also, businesses and institutions of higher education are already training accountants in IFRS procedure. American multi-national conglomerates are pushing for IFRS because they will not have to keep two sets of accounting books - one for GAAP and one for international subsidiaries that are required to use IFRS. Considering all of Europe and the leading economic powers of Asia, South American, and Africa have all adopted IFRS, it seems as though the United States will, too.

Advantages of IFRS

If the United States switches to IFRS as their accounting principle standard, all publicly traded companies would report on the new international standard. This change would not affect not-for-profit institutions and small businesses. By switching to IFRS, American international businesses would become more competitive because global investors would be able to decipher companies financial statements with less difficulty and with greater confidence. Because they would already be familiar with the accounting standards of IFRS, investors may be more likely to invest in companies since they have an understanding of accounting principles of revenue, inventory, liabilities, etc. For example, GAAP and IFRS report inventories differently. So a prospective investor familiar with IFRS more clearly understands the financial position of a company. This benefit is on a smaller scale. One must also consider investments on a larger scale. Foreign corporations are also more likely to invest in US businesses if everyone was adhering by the same standards. Studies have shown a convergence from GAAP to IFRS, more often than not, improves a companies financial statements with IFRS. This is good news for businesses as well as investors.

Disadvantages of IFRS

Implementing a new accounting standard nation-wide could potentially be expensive and frustrating. Accountants, CPA's, and businesses who are accustomed to GAAP are forced to learn new principles under the international system. This will require training and re-education of the workforce in order to implement a new accounting system. There are certificate programs as well as other education programs currently available for people to gain knowledge and experience with IFRS. Some experts believe IFRS is the biggest change in accounting policy since GAAP was established in the 1930's.
Also, IFRS is more broadly defined as to its guidelines. GAAP on the other hand, is much more specific in its overall principles and constraints. It may be easier for accountants to use IFRS because it allows for some objective decision making in regards to how businesses interpret IFRS. This fact may cause some distrust among American investors who are unfamiliar with IFRS. A key reason for the success of GAAP is its detailed, rule oriented approach to accounting.

Conclusion

Because of the international acceptance of IFRS, it seems inevitable that the United States will be adopting IFRS sooner, rather than later. The groundwork is being laid for the transition away from GAAP. The market today truly is a global economy and this is proof of that fact. IFRS has been tested around the world and the majority agrees it has been successful. This is a progressive way of thinking and being innovative in today's worldwide market place. Although the transition ultimately will not be seamless, groundwork for adoption is being presented by FASB and other accounting foundations. The re-education of current accountants along with educating and training new accountants is crucial to the success of businesses using IFRS. Since IFRS questions will be on the CPA exam starting in 2011, IFRS education has already begun with the next generation of CPA's. After the transition period from GAAP to IFRS, the United States will benefit from a global, homogenous accounting system in today's global economy.

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