GAAP and IFRS: One World Under One Set of Accounting Principles

Globalization, the process of international integration, has taken over today’s business world. More and more, we are seeing companies expand overseas for a variety of different reasons, making it difficult for U.S. accountants to keep up, and continue to follow the correct accounting guidelines. In the business world today being bilingual in the accounting language is essential to a company’s success. (Pounder) Bridging this gap between the United States Generally Accepted Accounting Principles (GAAP), and the International Financial Reporting Standards (IFRS) is essential to accountants, and creating a friendly international business environment.

Although both IFRS, and GAAP were created to keep accountants all around on the same page there are some differences between the two. One of the major differences between U.S. Generally Accepted Accounting Principles, and the International Financial Reporting Standards is the chance of interpreting the same situation differently. This stems from GAAP being “rule-based”, and IFRS being “principle-based”. (Nguyen) For example, IFRS, follows last in, first out (LIFO) for calculating inventory costs; whereas, GAAP allows for accountants to use both LIFO, and first in, first out (FIFO). (Nguyen) Even slight differences like this one can result in misinterpretation, and miscommunication. When speaking about the “slight” differences separately it seems as if they cannot make that big of a difference. Unfortunately, that is not the case; along with the previously stated example the list is long and includes concepts such as, dealing with intangibles, leases, and recognizing goodwill, consolidation, and also statement of income.

U.S. CPAs, and accountants have followed GAAP for many years now, and changing the principles would require many to learn new ways to go about tasks differently then they have been doing in the past. In turn, it would frustrate those who have to go through it. Also, making a change that would essentially be mandatory for all businesses can be costly to business owners who would have to provide training to staff. Others may be opposed to the switch due to the difference in methodology. Those who practice using GAAP believe that it is of a higher quality due to it being rule based. (Pologeorgis) The solution to such problems would be to merge to two separate entities into one hybrid, international version. This would bring the best concepts and rules, from both. The hybrid would be extremely more efficient.

Staying competitive in a global marketplace means abiding by the correct accounting standards. This also becomes a problem when it comes to making investments overseas. This is especially true now that almost 140 international countries use IFRS. According to Diaconu, and Coman in “Accounting Research from the Globalization Perspective”, harmonization between IFRS, and GAAP will improve the tendency for accounting standards throughout the world to be raised to the highest possible level. International Accounting Standards Board (IASB), and the Financial Accounting Standards Board (FASB) are collectively working to create a better business environment for those looking to expand overseas.