Harmonization Between GAAP and IFRS

The list of comparisons between the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) goes on and on. With so many small differences, GAAP and IFRS end up being slightly different sets of standards and there is still no definite conclusion as to which is a better system to follow. The overall goal is to one day come up with a common set of guidelines that every company will follow and thus make accounting and transactions between businesses simpler.

Some people think that rules and principles are basically the same thing which is not the case. When we talk about GAAP and IFRS these rules and principles play a huge part in determining how a business can go about a transaction. According to Remi Forgeas, an audit for Mazars Corporation, GAAP is much more detailed than IFRS and is based on the rules that the FASB has determined are necessary, whereas IFRS is based more on the general principles of accounting. The downfall of following principles as opposed to rules is that there is such a broad interpretation of what a business can do. With GAAP these issues do not occur as often because rules are rules and there usually aren’t ways around them.

Big 4 firm KPMG had a team publish a lengthy list comparing GAAP and IFRS. This list is over one hundred pages, goes through almost every account, transaction, or measurement and shows a side by side evaluation with detail of how GAAP and IFRS goes about recording those items. This shows that in order for these two systems to converge it will take some time and work. If we can interpret the common principles that both GAAP and IFRS believe in then we should be able to reach an agreement in combining the two methods. With the harmonization of these accounting methods both users of GAAP and IFRS will have to make some changes.

On the other side of the spectrum, many believe that the U.S is leaning towards converting to IFRS. Before adopting this method the benefits and consequences must be looked at carefully. A group of researchers examined 3,100 companies across 26 countries and came up with the following results. Many of these companies’ benefits included an increase in the stock market value, an increase in market liquidity, and lower cost of capital (Lee and Smith). These are anticipated perks of making the transition to IFRS. The major cons of switching from GAAP to IFRS is the cost of transition which may exceed the benefit and with GAAP’s high standards financial improvements will be minor. Another impact of completely adopting IFRS is the loss of LIFO. Currently in U.S GAAP businesses have the option of FIFO, weighted average, and LIFO. LIFO allows companies to sell the last items produced first which helps them match current cost with current revenues. This method tends to result in reduced methods levels of taxable income and thus allows companies to conserve cash (Hynek, 2011).

The bottom line is that the process of harmonization is a long and complicated effort and may never happen. It is true that the U.S is leaning towards changing to IFRS but there are still those factors that were mentioned above and many more that are making corporations, the FASB, and the SEC hesitant to adopt IFRS. There are two very important questions that it all comes down to. Will we benefit from this change in the long-term and many years in the future? Will it be a significant improvement from the standards that are GAAP? This will affect many companies differently, some will experience major losses in converting and some may not. Smaller companies may not be affected as much by the new standards compared to larger companies. Some solutions to help smooth out the transition may be for IFRS to accept some of the standards that GAAP has to offer, this way U.S companies may still be able to make use of the original GAAP rules. Currently there is no major commitment of this change but perhaps in the near future we will see some changes in the accounting world.

 

Author: MixoBiz

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