Accounting in a Globalized World
In recent years the world’s economies have become intertwined and dependent upon each other as part of a push by world leaders toward a globalized world. What does globalization mean for professionals working in industries such as accounting and finance? To answer the question posed it is imperative to first understand what globalization is. Globalization by definition is “a process of interaction and integration among the people, companies, and governments of different nations driven by international trade and investment and aided by information technology. Globalization effects country’s environments, cultures, political systems, economic development structure, prosperity, and citizen’s physical well-being around the world.” Accountants in the United States can no longer rely only on GAAP when doing business. Since the world continues to expand toward interconnectivity it is necessary to explore globalizations implication on GAAP and to analyze what the future business environment will look like. Comparing GAAP and IFRS will help to explain accountant’s purpose in the world’s new business environment and understanding both systems will help accountants work to at an international level.
Generally accepted accounting principles, known as GAAP, are the criteria that U.S. accountants use when they compile information used for company financial statements. GAAP is very detailed and rules-based. The Securities and Exchange Commission requires U.S. companies to adhere to these rules in an attempt to create homogeny across the business landscape in the United States making it easy for investors to compare financial statements. The SEC allows the private sector to set GAAP which has made the rules subject to intense political pressures. Since GAAP has been around for over 65 years and over 2,000 documents have been filed the Financial Accounting Standards Board (FASB) has established a GAAP codification that is considered the one and only piece of authoritative literature with regard to particular accounting topics. In this sense FASB hopes to make using GAAP and doing research on GAAP more efficient and effective. Comparing GAAP to IFRS creates problems for investors when they are deciding what the best decision to make with their money is.
IFRS stands for International Financial Reporting Standards. Over 110 countries in the world report financial information using IFRS. The international method simplifies the process of accounting, it however does not give specifics on how to report but rather gives companies in different countries a framework to follow on how to prepare and disclose financial information onto their financial statements. IFRS differs on many different levels from GAAP and this creates problems when trying to compare company’s financial statements even if the companies are in the same industry. Businesses may also have trouble in deciding on things such as acquisitions because of the different standards. Other areas in which the two standards differ is in asset valuation, preparation of the income statement, inventory valuation, and revenue recognition.
The British company Cadbury can show just how much of an impact using different standards can have on business decisions, “Just before it was acquired by the U.S. firm Kraft, in 2009, Cadbury reported IFRS-based profits of $690 million. Under GAAP those profits totaled only $594 million—almost 14% lower. Similarly, Cadbury’s GAAP-based return on equity was 9%—a full five percentage points lower than it was under IFRS (14%). Such differences are large enough to change an acquisition decision.” It is the job of an accountant to not just crunch numbers but to be an adviser to business in making important decisions.
One option to unite the two standards comes from the EU Commissioner, Michel Barnier who suggests extending Country-by-Country Reporting (CBCR). “Extending CBCR to other sectors beyond extractives and finance must go further now and take measures on more transparency on tax for all large companies and groups – the taxes they pay, how much and to whom’. In short, CBCR could represent a major transformation in the structure of corporate financial reporting. In the words of Richard Murphy, the leading proponent of CBCR, it is about ‘accounting for globalization locally’.” Since there is no set global standard that everyone follows all suggestions are out on the table in finding a way to account for financial transactions of businesses in an effort to find the most efficient and effective method.
Accountants are responsible for a diverse amount of tasks. To be successful in the present business environment it is imperative that accountants understand the differences between GAAP and IFRS and use this knowledge when advising business on what the best decisions they can make in the future are. Finding a method that the whole world can agree on seems like an impossible task but accountants who can understand both sets of rules can apply their knowledge to overcome any obstacle that may come in the way of making the most responsible business decisions.
© 2018 Ryan Susko