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IFRS vs GAAP

If there is one word that could sum up the most significant change in the business world over the last decade it would be: Globalization. The most successful companies in the U.S. continue to expand sales and operations in Latin America, Europe, The Middle East, Africa, Asia, and Australia, among other countries. In the past, many countries established their own accounting and financial reporting standards. There were significant differences between the reporting standards of each country and it caused nightmares for outside investors and stakeholders who wanted to compare financial data on the basis of performance and outlook. As the business world embraced globalization, a uniform set of standards needed to be established. In 2001, the International Accounting Standards Board (IASB) took over responsibility for establishing international accounting standards referred to as International Financial Reporting Standards (IFRS). As countries adopt IFRS, it will reduce the costs they were previously incurring for producing alternative financial statements according to different standards. For example, a U.S. company with operations in Asia may be required to report their financial statements in IFRS or a local GAAP for statutory purposes but they must also convert their financial statements to U.S. GAAP so that the parent company in the U.S. can consolidate their results. This requires lots of resources and extra complex work to accomplish.

Initially, there were significant differences between IFRS and U.S. GAAP. Conceptually, U.S. GAAP standards are more rule-based whereas IFRS are more principle-based. Typically, principle-based standards leave more room for differing interpretations on similar transactions and rules-based standards are more specific in their requirements. You can think of IFRS standards as more “gray” in certain areas while U.S. GAAP standards are more “black and white” with respect to accounting for specific complex transactions. However, the IASB worked to provide clarification of the principle based standards which means there will be fewer exceptions and interpretations for similar transactions. The biggest challenge that the IASB and the FASB face is how and when to converge their standards before U.S. companies officially transition over from U.S. GAAP to the IFRS. Initially, it was expected that U.S. GAAP would be replaced by IFRS no later than the year 2014 but there have been many serious concerns between the two boards as they have tried to come up with the best way to converge their standards. In the fourth quarter of 2012, the SEC provided an update stating they agreed that the IFRS standards were high-quality but found many potential concerns about key differences between U.S. GAAP and IFRS. Many professionals monitoring the situation feel that it could be at least another five years before the full transition takes place.

For now, we must keep in mind that it is not a matter of if, but when, a global set of accounting standards gets adopted in the U.S. The best way to be prepared for the transition as an accounting student or professional in the accountancy or finance field is to keep up with all of the progress (or lack of progress) in the IASB and FASB meetings. The global accounting firm, PricewaterhouseCoopers LLP, has a website that provides continuous updates on the convergence.  It can be found at:

http://www.pwc.com/us/en/issues/ifrs-reporting/index.jhtml


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