- Business and Employment
GAAP vs. IFRS
Globalization has led to most countries following and teaching the accounting principles of IFRS. United States based companies follow the rules of GAAP which causes complications for United States companies that want to do business internationally. Both practices of accounting provided useful and accurate interpretations of a company’s financial situation. However comparing a financial statement that was made following GAAP to a statement that follows IFRS could lead to meaningful discrepancies.
The United States uses GAAP or Generally Accepted Accounting Principles for financial reporting. GAAP are rules that must be followed on financial statements and only are acceptable within the United States. Unlike GAAP, IFRS or International Financial Reporting Standards is principal based. This means when business transactions occur GAAP must follow a certain progression of steps to record it without variance. Whereas IFRS is able to interpret the transaction is a few different ways. Another difference with IFRS being principle based versus GAAP being rules based is you cannot find a loophole isn a principle as easily as you could a rule. Since principles are vaguer than a specific rule it covers more potential threats to unfaithful reporting. An example of this would be historical cost used in GAAP versus the “real value” used by IFRS for fixed assets. Historical cost used the price paid for the asset while “real value” uses the estimated value of the asset today. “Real value” is extremely useful for companies who invest in something for its future economic benefit.
Another United States companies face is double accounting work. For reporting and auditing financial information United States based companies are required to us GAPP which is useful when comparing financial statement to other US based companies or internally within the business for management. However for international reporting, and in more than 110 countries, International Financial Reporting Standards is used. (Bannister) The double accounting work is extensive as well. An examples would be IFRS not recognizing LIFO as an acceptable inventory system. If the cost of a product is increasing, using LIFO saves a company money because a higher cost against gross income results in less taxable income. If a company using LIFO needed to report internationally now, any financial statement involving inventory would have to be reevaluated to satisfy IFRS. (Intuit Team) This double accounting causes an additional disadvantage other than just doing more work for United States accountants as well.
Accountants who studied in the United States are taught how to satisfy GAAP when doing financial reporting and the CPA exam certify them to do that. They are not however taught to satisfy IFRS principles, so they may not being preparing the best IFRS-satisfying financial statements. This is bad for the company reporting the information because it may not be the best reporting it could be for the company. It is also detrimental to all United States taught accountants. In an ever globalizing world economy, accountants taught to satisfy only one countries accounting rules is less valuable than an accounting who can satisfy accounting principles in over 100 countries.
Bannister, Jazmin I. "The Effects of Globalization on Both Accounting Profession and Education." The Effects of Globalization on Both Accounting Profession and Education. 21 Apr. 2016EzineArticles.com. 5 Oct. 2017
Huff, Graham "The Impact of Globalization on Management Accounting." The Impact of Globalization on Management Accounting. 20 Nov. 2012EzineArticles.com. 5 Oct. 2017
Intuit Firm of The Future Team. “Top 10 Difference Between IFRS and GAAP.”FirmOfTheFuture, Intuit Quickbooks, 2017, www.firmofthefuture.com/content/top-10-differences-between-ifrs-and-gaap-accounting/.
Pounder, B. (2007). How Globalization is Affecting U.S. Accountants. Montvale: Institute of Management Accountants.