December 3, 2012
US Gaap VS Ifers
“A tectonic shift in accounting rules from US GAAP to the international standard, IFRS, may be under way.” (Rueschhoff 331). Many fear the Securities and Exchange Commission will make it mandatory, which could mean accountants across America might need to be re-educated. A single international standard is meant to simplify the world of accounting, however, applying a foreign standard could be a solution more complicated than the problem. In the United States, GAAP means generally accepted accounting principles. These are rules used to prepare, present, and report financial statements for a wide variety of entities. GAAP includes applicable accounting framework that is related to accounting law, rules, and standards. Internationally, IFRS means International Financial Reporting Standards which are principles based, interpretation, and the framework adopted by the International Accounting Standards Board (IASB) founded in 2001. One virtue of U.S. GAAP where accounting for financial instruments is concerned is that it’s more transparent than what the Europeans and others on IFRS do. IFRS gives less information and it constitutes one book about 2 inches thick. U.S. GAAP, in contrast, covers over 25,000 pages. A Study in The British Accounting Review in June 2010, revealed that in “press releases managers strategically emphasize non-GAAP measures inflating the cash flow and stability of a given company.” (Marques 119) The move to IFRS makes a fair amount sense given the global nature of capital markets; moreover, American investors will simply have to learn to read a balance sheet constructed using different rules. The rules and regulations of GAAP may be immense and some would argue that they are not even enough when considering fraud. Others fear puffed financial statements that weaken shareholder’s stock. The U.S. has been leader in almost every aspect of business, one would ask, why isn’t the world conforming to US GAAP? Many differences to IFRS weaken the precision of accounting. Six, of many differences between GAAP and IFRS are covered here.
Measuring Fair Value has many differences between GAAP and IFRS, because there are many things that need to have a value assigned when determining the financial state of a company. Carrying value of assets, for instance, under GAAP, are generally carried at historical cost. Historical cost is the primary basis for IFRS, however the ability to revalue assets to fair market value is allowed. By revaluing assets, there could be significant differences in the carrying value of these assets versus GAAP. Once again, and probably over and over again, financial statements will inflate a company’s value while accounting with IFRS method. IFRS also differs from GAAP in the way they measure long term assets. Under IFRS, companies are allowed to measure property, plant, and equipment at fair value instead of book value. This is a very different procedure in comparison to GAAP. This different measurement requirement could have a significant effect on debt-to-equity and other balance sheet ratios.
The inventory differences are a major concern for GAAP companies. IFRS does not allow a method of inventory costing called LIFO. LIFO is especially helpful during periods of rising prices because it allows companies to account for the sale of goods by taking those they bought most recently and expensing them in the Cost of Goods Sold section of their Income Statements. “During inflationary period this means that the higher price inventory items go out first, and that reduces corporate income taxes.” (Rueschhoff 326) The U.S. has the highest corporate tax rates in the world, and executives are desperate to do whatever they legally can do to get taxes down so they stay competitive. 36% of U.S. companies use the LIFO option and switching to IFRS will not only eliminate the LIFO option,...