America Adopting IFRS or Keeping GAAP
With all the changes and innovations with new technology many companies are deciding to work on a more global scale. Whether companies are looking to globalize their operations because of lower costs, capitalize on resources that are unavailable in their country, and/or looking to get involved with the advanced technology certain countries possess, it all comes back to how will we account for our operations. While most of the world uses IFRS and the push of many other countries look to join, America currently still uses GAAP. And of the countries that use IFRS, some recent adopters are strong economies, such as Canada and Russia, with China looking to join in as well.
When we look at the approach of IFRS vs GAAP, some main aspects we look at from a broad view comes down to principle vs rule-based, and consolidations. IFRS principle based can be broad, but the IASB has guidance to resolve any issues. For GAAP rule-based, it focuses more on staying within the guidelines and making professional judgements, which can lead to exceptions of these rules. Also, when looking at the two, under IFRS when consolidations are made, risk is looked to be avoided, but with GAAP risk is favored because of the possible benefits that can come. And while these two approaches are different, they can easily come together as a middle ground or have just IFRS followed and make adjustments.
While GAAP continues to be the focused practice in America, there’s been talk since 2015 of trying to switch to full convergence of IFRS. There already has been convergences between IFRS and GAAP in the past. For example, in 2007, the SEC gave companies the option to use IFRS to get rid of requirements that go along with issuing foreign stock to eliminate the requirement of corporations issuing foreign stock to reconcile consolidated financial reports to GAAP. The new form of revenue recognition is also a mix of GAAP and IFRS, so making more convergences now will make it that much easier to switch over to IFRS in the next years to come. The FASB and IASB have been working on ways to converge the two, it is very complicated to do so when taking into consideration GAAP principles with the rest of the world other accounting values and practices.
It is known that America is still leaning towards GAAP, but there have been talks of switching over to IFRS, which seem to become more and more common as time goes by. It was said that “Japan is the only country whose future move to IFRS may be affected if America stays away.” Which I think shows America is in no rush to change over. Another problem of the switch comes with different ways of recognition and valuations. For example, IFRS doesn’t allow LIFO to be used, so for all the companies who currently use LIFO, they would have a lot of adjustments to their taxable income. The FASB and SEC have talked about this situation and are looking at ways to get ahead of the problem for the possible switch in the future, whether it’s a transition period or have Congress change the tax laws. As far as valuations go, the adjustment for America would be tough because under IFRS you can revalue and if we adopted this, companies may take advantage of this approach to increase the dollar value of their assets, causing an increase in net income and earning per share.
For my stance, I think it would be in our best interest to join the majority of the global economy and adopt IFRS. In 2012, The SEC declined to recommend IFRS, but since about 2015, the SEC thinks the change has a lot more advantages. They mention that they encourage the use of IFRS because of the increased need for global congruency in times of economic burdening on markets, IFRS ability to help with transparency and comparability among reporting practices, and for international users of financial reports, their jobs would be that much easier.
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Lee, P. (2018). Assessment of Business Subsidiary Operations and Consolidated Financial Statements through a Common Global Accounting Language, IFRS vs. GAAP. [ebook] nternational Journal of Business and Social Research, pp.61-69. Available at: http://thejournalofbusiness.org/index.php/site/article/view/746/541 [Accessed 7 Feb. 2018].
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