Generally Accepted Accounting Principles Vs. International Financial Reporting Standards
What is globalization? Globalization is the act of expanding to other or even all areas around the world from the country of origin. Much like its very broad definition, Globalization can be the basis for discussion for a wide-range of topics. To narrow down a bit, I will focus mainly on the Generally Accepted Accounting Principles (GAAP) in comparison to the International Financial Reporting Standards (IFRS). I will be calling attention to a few of the differences between IFRS and GAAP as well as touching upon some of the similarities between the two accounting standards. In addition, I will discuss several of the advantages and disadvantages of the United States converting from using GAAP to IFRS.
Throughout the world there are two main systems of accounting, the Generally Accounting Principles, also know as GAAP, and the International Financial Reporting Standards, otherwise known as IFRS. According to The Business Dictionary, “GAAP provide objective standards for judging and comparing financial data and its presentation, and limit the directors’ freedom in showing an unrealistic picture through creative accounting” (4). With this system come benefits as well as negative aspects. One benefit provided by GAAP is that the system is rule based, which means there is less room for exceptions (2). With this aspect, it becomes easier to produce correct statements while avoiding mistakes and errors. An additional advantage is that GAAP separates their different entities into different parts. As far as disadvantages go, the main and arguable the most important is that of the nonexistent universal way in which to do the accounting standard. As a result, it becomes more difficult to compare statements and records with those of other countries.
The Generally Accepted Accounting Principles and the International Financial Reporting Standards differ from one another while also possessing similarities. One difference is that in regard to consolidation, GAAP tends to lean toward the system of risk and reward, while on the other hand; the IFRS favors more of a control model (2). Another difference exists among each standard’s balancing statements. When it comes to GAAP, there is no specific layout that exists for balance sheets and financial statements (1). Contrary to the GAAP standards, the IFRS has a stricter approach to accounting these summaries and reports(1). They implement this approach by requiring a list of minimum lines items to be present on the statements. Another way in which the two accounting principles vary is that while both use the First In First Out Method (FIFO), the IFRS strictly prohibits the use of the Last In First Out (LIFO) method, which the GAAP allows companies to have the choice between LIFO and FIFO (2). Lastly, a significant difference to be addressed is the well-known fact that GAAP is used solely in the United States, while the IFRS is used in over 133 countries (3). A similarity that exists between these two accounting principles is their mutual incorporation of the following into their financial statements: the balance sheet, income statement, changes in equity, cash flow statement, and footnotes.
For the last few years there has been talk about the United States converting from the Generally Accepted Accounting Principles over to the International Financial Reporting Standards (5). The adaptation of the IFRS by the United States will bring about both advantages and disadvantages as a result. One resulting benefit would be the ability for foreign companies to much more easily relate with the present information within the United States. Another advantage is that the IFRS is already universally known, which effectively makes it more help friendly and accommodating so that other nations do not need to learn new systems. However, with all advantages come a few disadvantages. One of the major disadvantages is that the IFRS does not have the level of security that the GAAP does(5). Without the proper protection, there is more room for the occurrence of fraudulent financial information. Another drawback of the conversion to IFRS is that people are uncertain how they feel about something new. Some companies do not know if the change will be worth it for their business.
In conclusion, GAAP vs IFRS is a highly discussed talk about globalization. These two accounting systems both have their positives and negatives. Previously, I defined what GAAP and IRFS was, and gave a few comparisons and differences about them. Also I gave a several advantages and disadvantages of the two frameworks. Last I provided positives and negatives of the United States converting over to IFRS from GAAP.
Works Cited
1. Ernst & Young. US GAAP versus IFRS: The Basics. United Kingdom. Print.
2. Forgeas, Remi. “Is IFRS That Different From U.S. GAAP?” IFRS Resources. AICPA, n.d. Web. 13 Apr. 2014. <http://www.ifrs.com/overview/General/differences.html>.
3. “GAAP vs IFRS.” Difference and Comparison. Diffen, n.d. Web. 13 Apr. 2014.
4. “Generally Accepted Accounting Principles (GAAP).” Business Dictionary. Web Finance, n.d. Web. 13 Apr. 2014.
5. Ernst & Young. US GAAP versus IFRS: The basics. United Kingdom, 2012. Print.