- Business and Employment
The Difficulty of Merging GAAP and IFRS
The Difficulty of Merging GAAP and IFRS
By: Kyle Hoops
In the accounting world, the two most widely accepted accounting guidelines for businesses are the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS). GAAP is used strictly in the United States, whereas IFRS is the main accounting standards for many foreign countries. With an ever more global economy, there has been effort, and some success, to bring these two standards closer together. The International Accountings Standards Board (IASB) has worked for years to create one set of accounting standards for everyone across the globe. While the IASB has gotten many countries to accept their standards, the U.S., which hosts the largest and most influential market, still does not follow IFRS. GAAP and IFRS have slowly made some progress towards convergence and unity of their accounting standards. This has been seen in the Norwalk Agreement, whose goal was to “achieve compatibility and remove differences between International Financial Reporting Standards.” Despite noticeable progress towards convergence over the last decade, there are still some significant differences between the two standards that have proven to be roadblocks from creating a single uniform standard.
One barrier the convergence effort faces is the difference in nature of the States’ business landscape from foreign ones. CPA Alex Bogopolsky described the U.S. as a “highly litigious business environment where, if something goes wrong, accountants and auditors are often blamed before anybody else.” As a result, U.S. accountants desire more clearly defined rules rather than broad principles that force accountants to rely on discretion. This is not an easily reconcilable difference, as much of the dissimilarity stems from a difference in culture between the U.S. and foreign cultures. Some countries are more comfortable and are able to handle a more lenient set of accounting rules. Instances such as the Enron Scandal demonstrate why the U.S. is not able to act this way. Even looking beyond major scandals, the U.S. market is extremely competitive, and with so much money at stake, it is important that no one is getting an unfair competitive advantage.
Another major obstruction in the way of unifying the two standards is political reasons. The U.S. will not easily give up control over domestic issues to a foreign power, even if this foreign power is supposed to be neutral in decision making. Bogopolsky states the SEC feels that “IFRS lacks consistent application, allows too much leeway with judgment, and is underdeveloped in many specific areas, for which the US GAAP has detailed and accepted guidance and established practice.” When asked to speak on behalf of investors about convergence, the SEC stated in its July 2012 Final Staff Report that, “investors do not believe that high-quality standards should be compromised for the sake of uniformity.” Essentially, the U.S. would not use IFRS until the SEC feels that those standards are up to an acceptable level. It would be counterintuitive to take a step backwards just to appease an international committee. The purpose of accounting standards is to help guide and ensure that accountants are accurately and ethically reflecting a business’s financial status. The SEC went on to say that, “investors noted that the FASB, in acting as an endorser, could serve an important role, ensuring that any standard incorporated into the US financial reporting system is of sufficient quality so as to maintain or improve on the financial reporting system.” This is an important statement to analyze. Basically, the SEC is saying that even if convergence between GAAP an IFRS did happen someday, the rules being used would still all be reviewed and altered, if seen fit, to match the interest of American Investors.
The two major roadblocks in the way of convergence of the Generally Accepted Accounting Principles and the International Financial Standards Board are the nature of the U.S. economic landscape and political reasons. Technical differences between the two that also pose issues have not been mentioned in this discussion. Globalization has resulted in many good things and will continue to; however, globalization for the sake of doing so is not wise. When discussing accounting standards, trillions of dollars are at stake; therefore, the U.S. will not be hasty to adopt what is a weaker set of accounting standards in their eyes. What remains questionable is if the U.S. will continue to be a powerful market in the future. If major international businesses were to focus their efforts elsewhere, there may be an even greater push to converge these accounting standards. Cultural differences will always be a roadblock. Only time will tell if these two giants in accounting standards will ever exist in perfect harmony.
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