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There has been difficulty switching from the Generally Accepted Accounting Principles (GAAP) to the International Financial Reporting Standards (IFRS). The idea is to improve both standards and then make them fully compatible. The effort of improvement and compatibility is primarily orchestrated by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). These two organizations began collaborating toward convergence in 2002. However, the idea to converge US GAAP with IFRS began in 1988 when the Security and Exchange Commission (SEC) first introduced the idea to establish a unified accounting standard. In addition, the AICPA is fully supportive by lending help with financial reporting topics and by willing to help CPAs with the transition from one standard to another. For the most part the two standards are changing to become more similar; however, they do consist of some differences.

To begin, for there to be struggles to converge, there needs to be reasons to consider convergence. One such reason is that a single set of standards is important for economic growth. As determined by 143 leaders in 91 countries, 90% believe a single set of international standards is essential for economic growth. The use of one standard will inevitably decrease compliance costs and reduce inefficiencies associated with using different accounting requirements. The costs of preparing multiple financial statements can also be easily avoided if unified accounting standards are set in motion. Not only reducing the costs, but comparing financial results among different countries will be made a lot easier. Additionally, the single set of standards will enable financial professionals to become more mobile.

By mobile it simply means financial professionals will have the ability to assist companies around the world in a more timely fashion by having the capability of knowing the rules and standards. The importance of having a common standard for financial reporting has increased along with the business world becoming more global.

But before one can decipher the differences and similarities between US GAAP and IFRS, we must first define IFRS and the benefits of using such a standard. IFRS is the International Financial Reporting Standards that is currently determined by the International Accounting Standards Board (IASB), effective April 2001. These set of standards were first enacted for smaller countries that did not have the funds to establish their own accounting standards. Furthermore, there are a number of countries that allow the use of IFRS and that number continues to increase. There are currently over 120 nations that allow or require the use of IFRS. The main benefit of using IFRS is that it will make it easier for companies to compare financial results by using one "accounting language." The value of this one language is great for companies that have subsidiaries around the world or even those competing with companies around the world.

On the other hand, we have the Generally Accepted Accounting Principles which were developed over the past 60 years and are considered to be the "gold standard of reporting". The standards were originally 51 accounting research bulletins formed by the Committee on Accounting Procedure (CAP). These financial reporting standards are now set by the Financial Accounting Standards Board (FASB), as determined by the American Institute of Certified Public Accountants (AICPA). The Accounting Standards Codification (ASC) then combined the research bulletins, the Accounting Principles Board (APB) opinions, statements, and other SEC rules to form the current single source of US GAAP. The principals are so in depth that there are over 2,000 documents containing all of the information. US GAAP consists of groups such as the Financial Accounting Standards Board (FASB), the Accounting Principle's Board (APB), Accounting Standards Executive Committee (AcSEC), as well as many other accounting principles.

 

There are several differences in the two standards and one such difference is that the International Financial Reporting Standards allows a single-step method, instead of the two-step write-down method currently instituted by the US Generally Accepted Accounting Principles. This change would make write offs easier and as a result make the occurrence of write-downs more frequent. This would ultimately lower the taxes paid by a company due to more impairments being written off.

In addition, there are the cash taxes, which could alternate how companies conduct transactions. In the past, the United States has accepted three separate methods for recording inventory, FIFO, LIFO and weighted average, but this is no longer the case. IFRS does not allow the use of Last In First Out (LIFO) method as an inventory costing method and would then have to cost items at actual cost. LIFO, or Last In First Out, was a way of recording inventory where a company would use the most recently purchased items as the first sold.  This method was used as tax deferral because the company could sell newly purchased units that were bought at a higher price first, thus claiming less income and tax on the sale. This change could have a negative impact on companies when tax season comes around. The requirement is switching over, but it will take several years.

Furthermore, after stating the two standards, reasons for convergence, and the differences among the two standards, we have the concerns associated with the convergence. One concern with conversion would be the educational aspect. Most accountants are trained for US GAAP, not IFRS; consequently, education will need to be updated and furthered. Some steps would be to require training in firms and updating textbooks in high schools and colleges. In addition, the CPA exam would also need to be re-designed to include new sections and alter some of the current ones that exist. Countries are also concerned that they may never reach compliance fully. Some standards may not be in a company's best interest in another nation; however, with compliance companies would no longer be able to selectively modify standards. Not only that, but the IFRS is less detailed and is industry-specific guided; therefore, countries question whether or not IFRS is sufficiently developed to use as a core system of reporting. As a result, all the work required for the change and the concerns are the reasons why enacting the single set of standards keeps being pushed off until future years. The Securities and Exchange Commission (SEC) needs to be assured that incorporating IFRS as the financial reporting system is the right decision.

In conclusion, the Convergence to the IFRS is an in depth process; however, it has developed a tremendous amount since 2001 when the convergence first began. There are a few key differences and concerns that are being worked out by the IASB and the ways to fix them are still being determined through projects and research. However, when the convergence is finally completed it will institute a single set of accounting standards worldwide and international companies will find it easier to conduct business. As a result, countries are looking forward to 2015, which is the forecasted year to start requirement for reporting under the new system. By 2012, it is also predicted that Mexico, Canada, India, and Japan will be converted to IFRS. However we don't have to wait until future years for Australia, New Zealand, and Israel to converge because they have already essentially adopted IFRS as their national standards. In concluding, we look forward to the day where CPAs from different countries can talk the same "accounting language" and be able to easily compare financial results on the basis that they depict the same reporting standards.

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This article was published on 2011/03/24