The United States of America uses a type of rule-based accounting standards called GAAP (Generally Accepted Accounting Principles) while over 110 countries around the world abide by a principle-based accounting system called IFRS (International Financial Reporting Standards). There are some differences between the frameworks of the two accounting standards, but there are also a striking amount of similarities. A question then arises: why does most of the world use IFRS while the United States uses GAAP? There are many pros to each methods as well as cons, looking at each method separately will help show why the majority of the financial world uses IFRS.
The International Financial Reporting Agency may trump GAAP primarily on the fact that it is more widely used, but looking more into the principles and framework it uses can help show why so many countries use it. When US countries that trade internationally finish their fiscal year, their accountants take time to convert each financial statement to abide by IFRS so international companies can see how they have done in the past year(s). This goes to show that by switching to IFRS US companies would save time and money each year, which is how Dr. Holger Daske explains it in his book by claiming: the argument set forth by international reporting standards is that a universal set of regulations will help to lower the cost of capital for the adopter (Daske 332). The SEC is looking to make the switch from GAAP to IFRS in the near future ("GAAP vs IFRS"). If the US were to switch to the IFRS method, it wouldn't necessarily be the toughest switch to make, at least for accountants, since accountants are already trained to use IFRS, although many other factors will be affected by the change. IFRS is set up through a principle-based system, which means accountants who use this system must follow the objectives for fair and proper reporting of financial data set forth by them. The IFRS allows businesses across the globe to easily communicate their financial reports to one another. The concept of going concern is the assumption that an asset(s) will remain in the company for the future, but the accountant defers recognition of expenses to a later period in order to use the asset(s) in the most effective way possible. This is a very useful way of lowering expense that is used consistently in IFRS, but is rarely used in GAAP. These ways show just how useful IFRS is in connecting the world internationally through business.
The rule-based accounting system accountants adhere to, GAAP, was originally created by the Amercan Insititue of Certified Public Accountants (AICPA) and the Securities and Exchange Commission (SEC). New rules and regulations have been added by the Finacial Accounting Standards Board (FASB) in 1973, but in 2008, the FASB looked at every rule and regulations and condensed the procedures of GAAP to approximately 90 topics. The use of first in, first out (FIFO) and weighted-cost average, are used to evaluate inventory in both IFRS and GAAP, but the last in, last out (LIFO) method is used only in GAAP, which can be used to benefit companies. Although no matter what inventory evaluation used, expenses and profit will be recorded the same, but inventory and cost of goods sold could drastically differ when using LIFO compared to the rest. US companies use LIFO for tax purposes, producing a higher cost of goods sold which lowers taxable income compared to FIFO. Also, GAAP separates their reports for business and non-business entities, while there is no distinction between the two for IFRS.
While GAAP and IFRS are different in many ways, by taking a closer look, it shows the similarities in the two. Both systems provide a range of important information to creditors, investors, and financial analysts in an appropriate, comparable, and most importantly, reliable way. A very useful similarity is the use of footnotes on financial statements, providing valuable information and performance quality for analysts to use in analyzing and comparing companies. All financial statements, balance sheet, retained earnings, and cash flows statement, are used similarly in both systems, such as how both balance sheets are required to list assets as either current or noncurrent.
The International Financial Reporting Agency may trump GAAP primarily on the fact that it is more widely used, but looking more into the principles and framework it uses can help show why so many countries use it. When US countries that trade internationally finish their fiscal year, their accountants take time to convert each financial statement to abide by IFRS so international companies can see how they have done in the past year(s). This goes to show that by switching to IFRS US companies would save time and money each year, which is how Dr. Holger Daske explains it in his book by claiming: the argument set forth by international reporting standards is that a universal set of regulations will help to lower the cost of capital for the adopter (Daske 332). The SEC is looking to make the switch from GAAP to IFRS in the near future ("GAAP vs IFRS"). If the US were to switch to the IFRS method, it wouldn't necessarily be the toughest switch to make, at least for accountants, since accountants are already trained to use IFRS, although many other factors will be affected by the change. IFRS is set up through a principle-based system, which means accountants who use this system must follow the objectives for fair and proper reporting of financial data set forth by them. The IFRS allows businesses across the globe to easily communicate their financial reports to one another. The concept of going concern is the assumption that an asset(s) will remain in the company for the future, but the accountant defers recognition of expenses to a later period in order to use the asset(s) in the most effective way possible. This is a very useful way of lowering expense that is used consistently in IFRS, but is rarely used in GAAP. These ways show just how useful IFRS is in connecting the world internationally through business.
The rule-based accounting system accountants adhere to, GAAP, was originally created by the Amercan Insititue of Certified Public Accountants (AICPA) and the Securities and Exchange Commission (SEC). New rules and regulations have been added by the Finacial Accounting Standards Board (FASB) in 1973, but in 2008, the FASB looked at every rule and regulations and condensed the procedures of GAAP to approximately 90 topics. The use of first in, first out (FIFO) and weighted-cost average, are used to evaluate inventory in both IFRS and GAAP, but the last in, last out (LIFO) method is used only in GAAP, which can be used to benefit companies. Although no matter what inventory evaluation used, expenses and profit will be recorded the same, but inventory and cost of goods sold could drastically differ when using LIFO compared to the rest. US companies use LIFO for tax purposes, producing a higher cost of goods sold which lowers taxable income compared to FIFO. Also, GAAP separates their reports for business and non-business entities, while there is no distinction between the two for IFRS.
While GAAP and IFRS are different in many ways, by taking a closer look, it shows the similarities in the two. Both systems provide a range of important information to creditors, investors, and financial analysts in an appropriate, comparable, and most importantly, reliable way. A very useful similarity is the use of footnotes on financial statements, providing valuable information and performance quality for analysts to use in analyzing and comparing companies. All financial statements, balance sheet, retained earnings, and cash flows statement, are used similarly in both systems, such as how both balance sheets are required to list assets as either current or noncurrent.
No comments:
Post a Comment