The US uses an accounting system called Generally Accepted Accounting Principles (GAAP) while other countries use the International Financial Reporting Standards (IFRS). Now that industries are globalized, the separate accounting principles cause issues when companies are doing business outside their country. The US Securities and Exchange Commission (SEC) is slowly working on converting the US accounting standards over to IFRS. There are some issues though that is causing delays in the process. This paper will discuss the issues the SEC is facing when converting the United States (US) from GAAP to IFRS.
Comparing IFRS to GAAP: IFRS 3-1
For years countries could decide how they wanted to set their accounting regulations. By 1990’s companies generally used either the International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP). The US commonly uses the GAAP standards, but in the near future will convert over to IFRS. There are issues that the US Securities and Exchange Commission (SEC) face while trying to convert the US over to IFRS. Some people refer to GAAP and IFRS as “Rules vs Principles”. GAAP is generally known as a Rule based set of standards that focus more on documenting all information within the company. With IFRS, it is a principle based accounting standard that follows facts and patterns rather than all information. For the SEC this means finding a median between these two standards. GAAP allows certain characteristics in accounting that the IFRS does not recognize. Some other issues that the SEC has to take into consideration are how the IFRS does not allow or does certain steps differently than GAAP. IFRS does not allow Last-in-First-Out (LIFO).
For companies that are globalized and use GAAP currently, they usually calculate both LIFO and First-in-First-out (FIFO) numbers so that when other companies who use IFRS review their financial statements, it is a clear comparison. Making a change from LIFO to FIFO can cause issues in how non-globalized company’s financial statements appear. The SEC is taking this into consideration when making the change. Another common standard that GAAP employs is the multiple-step method of accounting for income statements. Under the IFRS, only a single-step method is used. When comparing two financial statements using these two methods the GAAP seems to appear more organized and with more information than the IFRS. So for people to simplify using IFRS standards could make assessing a company’s success more difficult.
SEC has to take into consideration all of these changes and decide the best methods in transferring companies over to IFRS. So the big question is what does this mean for individual companies? The best advice is to start a process of slowly transitioning or training employees on how to incorporate IFRS standards instead of GAAP. This transition will affect more than just accounting, but other departments as well. The SEC is advising for all companies to prepare for the switch, but at the moment there is no current time frame on when the switch will happen. The SEC is doing their best to prepare for the issues that lie ahead and to have plans in place to help transition companies over to the new standards.
Forgeas, Remi. (2008). Is IFRS that Different from U.S. GAAP? Retrieved on 8/30/14 from http://www.ifrs.com/overview/General/differences.html
IFRS. (2014). GAAP and IFRS, Still Differences. Retrievd on 8/30/14 from http://www.ifrs.com/Backgrounder_GAAP_IFRS.html