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Will IFRS Prevail Over GAAP?

Updated on November 13, 2017

There are many differences for the yielding of the convergence of these two financial standards. The major differences between U.S. GAAP and IFRS are the accounting methods used in the accounting process. Let’s begin with GAAP, which “is rules based and focuses mainly on research; with GAAP accounting, there is little room for exceptions and interpretation, as all transactions must abide by a specific set of rules (IFRS and GAAP Accounting: Top 10 Differences & Effects on Business, n. d.).” Also, GAAP “permits all three inventory accounting methods which are LIFO (Last In, First Out), FIFO (First In, First Out), and weighted average (Lemus,2014).”

On the contrary, IFRS prohibits the use of the LIFO inventory, if the convergence were to happen and companies were not able to use the LIFO inventory method, this could be very detrimental for those companies. The main purpose for companies using this method is because it “helps in reducing the inventory profits by matching the most recent costs against revenues. It results in reduction of understatement of cost of goods sold (COGS) and overstatement of profit. Therefore, the quality and reliability earnings are improved under LIFO. (Accounting for Management, 2014).” Another benefit and a major reason for companies using the LIFO, Last-In, First-Out inventory method is the tax benefit, “current purchases at higher prices are matched against revenues which alleviate the overstatement of profit and therefore reduce income tax (Accounting for Management, 2014).” The reduction of income tax results in an improvement of cash flows. As you can see this is an issue and plays a very big part in the contemplation for the acceptance of IFRS. Unlike GAAP, which we discussed in the previous paragraph as a “rules- based” standard, IFRS is entirely principle based and focus mainly on the economic needs of a country. Due to IFRS being principle based “it provides less information and is by far less detail oriented then the rules based (Lemus, 2014).” Due to the United States being the largest capital market in the world, you can see why they’re reluctant to incorporate IFRS into their reporting system. The U.S. is also known to have “a highly litigious business environment where, if something goes wrong, accountants and auditors are often blamed before anyone else. In an environment of “high professional liability” it is understandable and even justifiable that accountants in the U.S. demand a highly elaborate set of very specific rules rather than “general principles” that merely declare neutrality and faithful representation, leaving a lot to preparers judgement (Bogopolsky, 2015).”

Now the IASB is pushing for IFRS to be the globally accepted standard across the world; however, with all the differences being said you can see why the Financial Accounting Standards Board (FASB) is a little slow at pushing action towards IFRS, and is pushing more towards differencing themselves from the international rules. The SEC states that they “will continue to promote the establishment of high quality accounting standards to meet the needs of investors. Due to the increasingly global nature of capital markets, the agency will work to promote higher quality financial reporting worldwide and will consider among other things, whether a single set of high quality global accounting standards is achievable (Bogopolsky, 2015).” Meeting the need of investors and protecting their interest is the main focus of U.S. GAAP and the SEC states that “investors do not believe that high quality standards should be compromised for the sake of uniformity” ( Bogopolsky, 2015).” This does not mean the SEC does believe there should be a single set of globally accepted standards, in fact the SEC stated that “they are willing to consider the idea of a single set of globally accounting standards; however, it never refers to IFRS or the IASB in the entire document (Bogopolsky, 2015).” So, the question of whether IFRS will be adopted in the U.S still remains. It obviously makes sense to have a globally accepted principle however if IFRS is admitted it is something that will most likely take decades to adapt to, not years.


Work Cited

Bogopolsky, Alex. “Does IFRS Have a Future in the US?” IFAC, 11 Sept. 2015,

www.ifac.org/global-knowledge-gateway/business-reporting/discussion/does-ifrs-have-future-us.

“IFRS and GAAP Accounting: Top 10 Differences & Effects on Business.” Intuit, Intuit Limited,

www.firmofthefuture.com/content/top-10-differences-between-ifrs-and-gaap-accounting/.

Norris, Floyd. “The Case for Global Accounting.” The New York Times, The New York Times, 10 May 2012,

www.nytimes.com/2012/05/11/business/the-case-for-global-accounting-rules.html

Lemus, Prof. Edel. “The Similarities and Differences between the Financial Reporting Standards under United States. GAAP versus IFRS.” Global Journal of Management and Business Research, Global Journals Inc., 2014,

webcache.googleusercontent.com/search?q=cache%3AFOJyVbXMTnIJ%3Ahttps%3A%2F%2Fjournalofbusiness.org

“Advantages and disadvantages of last-in, first-out (LIFO) method.” Accounting for Management, Accounting for Management , 10 Jan. 2017,

www.accountingformanagement.org/advantages-and-disadvantages-of-last-in-first-out-lifo-method/.

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