IFRS vs. US GAAP
In the world of accounting the word ‘convergence’ has become very popular. Convergence describes the elimination of differences and has become a priority for both the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB). Both the IASB and FASB understand that there is much to be done for both to converge the two sets of standards. The objective of the FASB and IASB is to lower costs for multinational corporations and to give investors the opportunity to make proper comparisons between companies from different countries, and this requires convergence. By adopting IFRS, companies can present their financial statements in the same way as their foreign competitors. This would benefit companies with subsidiaries in different countries that also allow IFRS as they will be able to use the same accounting language. On the other hand, many people in the accounting world believe that there are a couple of downsides to adopting IFRS. They believe that US GAAP is the gold standard and that if we fully accept IFRS in the US we will lose some level of quality and that the cost of implementing IFRS may outweigh the benefits.
Projects towards convergence are significant and will help all countries achieve the same accounting framework. A common accounting framework is essential in the accounting profession and is a necessary part of the globalization of business and investment. The main question that arises when discussing GAAP vs. IFRS is where the two sets of standards are similar and also where they diverge. The IFRS or International Financial Reporting Standards are a set of accounting standards developed by the IASB that is becoming the world standard for the preparation of the financial statements of public companies. Many people in the accounting profession also wonder why these differences exist and what could be done to eliminate them, if they ever are.
First, before explaining the differences between the two sets of standards, we must make it clear that while the US and international standards contain many differences, they have many more similarities. IFRS are based primarily on the same fundamental principles and share similar accounting results and conceptual framework as US GAAP. What distinguishes international standards from US standards is that they contain elements of accounting standards from a variety of countries. By creating these standards, the IASB was able to look at the US standards and determine where it could make changes to avoid some of the apparent problems in the US standard. In other words, it was able to take a new approach to the US standards. existing American standards and make an effort to improve them. This explains why the main difference between IFRS and US GAAP is basically the deviations of the standards from the US requirements. Other differences have developed through different interpretations. IFRS generally have broader standards than US GAAP and prefer to leave implementation of the principles to preparers and auditors.
Many wonder if the differences between these two sets of standards will ever be ironed out. Both IFRS and US GAAP have gone to great lengths to achieve that goal. In 2002, they signed the “Norwalk Accord” in which they made an agreement and commitment to work towards convergence of the two sets of standards. The Securities and Exchange Commission has played an important role in the proposed roadmap for convergence. Until the SEC issues a rule allowing US companies to converge to IFRS, companies must continue to follow US GAAP. The SEC expects all companies to adopt IFRS starting in 2014 and US issuers to report under this new system by 2015 or 2016. However, we must realize that convergence does not mean that all IFRS will be eliminated. differences. They may continue to exist in the standards even when convergence has been achieved.
Finally, once the Securities and Exchange Commission determines when to incorporate IFRS, a possible timeline will be used to follow the next steps in the adoption of IFRS. Many large companies such as Pricewaterhouse Coopers support the convergence efforts of the FASB and IASB; however, they also understand that convergence alone will not result in a single set of high-quality standards. However, we must be aware that the conversion to IFRS is not just an accounting exercise. Convergence will affect many areas of a US company’s operations. Information technology systems, internal reporting, and tax reporting requirements are just a few examples of these areas.