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Generally Accepted Accounting Principles Vs. International Financial Reporting Standards
What is globalization? Globalization is the act of spreading to other or even all areas around the world from a country of origin. Similar to its very broad definition, globalization can be the basis for discussion on a wide range of topics. To narrow it down a bit, I will focus mainly on Generally Accepted Accounting Principles (GAAP) compared to International Financial Reporting Standards (IFRS). I will draw attention to several differences between IFRS and GAAP, as well as some of the similarities between the two accounting standards. In addition, I will discuss several advantages and disadvantages of the United States’ transition from using GAAP to IFRS.
There are two main accounting systems around the world, General Accounting Principles, also known as GAAP, and International Financial Reporting Standards, otherwise known as IFRS. According to The Business Dictionary, “GAAP provides objective standards for judging and comparing financial data and their presentation, and limits directors’ freedom to present an unrealistic picture through creative accounting” (4). With this system comes advantages, but also negative aspects. One advantage that GAAP provides is that the system is rules-based, which means there is less room for exceptions (2). With this aspect, it becomes easier to produce accurate statements while avoiding errors and mistakes. An added benefit is that GAAP separates their various entities into distinct parts. As for the shortcomings, the main and arguably the most important one is the absence of a universal way of doing the accounting standard. As a result, it becomes more difficult to compare statements and records with those of other countries.
Generally accepted accounting principles and International Financial Reporting Standards differ from each other, but they also have similarities. One difference is that in terms of consolidation, GAAP leans towards a system of risk and reward, while on the other hand; IFRS favors a higher control model (2). Another difference exists between the balance sheet statements of each standard. When it comes to GAAP, there is no specific layout that exists for balance sheets and financial statements (1). Contrary to GAAP standards, IFRS has a stricter approach to the accounting of these summaries and reports (1). They implement this approach by requiring that a list of minimum items must be present on statements. Another way the two accounting principles differ is that while both use the first-in-first-out (FIFO) method, IFRS strictly prohibits the use of the last-in-first-out (LIFO) method, for which GAAP allows companies to choose between LIFO and FIFO (2). Finally, a significant difference that needs to be addressed is the well-known fact that GAAP is used only in the United States, while IFRS is used in more than 133 countries (3). The similarity that exists between these two accounting principles is their common inclusion of the following in their financial statements: balance sheet, income statement, changes in equity, cash flow statement, and notes.
In the last few years, there has been talk of the United States moving from GAAP to International Financial Reporting Standards (5). The adoption of IFRS by the United States will result in both advantages and disadvantages. One resulting benefit would be the ability for foreign companies to connect much more easily with existing information within the United States. Another advantage is that IFRS is already universally known, which actually makes it easier to help and accommodate, so other countries don’t have to learn new systems. However, with all the advantages comes a few disadvantages. One of the main disadvantages is that IFRS does not have the level of certainty that GAAP has (5). Without adequate protection, there is more room for fraudulent financial information to emerge. Another disadvantage of moving to IFRS is that people are not sure what they think about something new. Some companies don’t know if the change will pay off for their business.
In conclusion, GAAP vs. IFRS is a much debated globalization conversation. These two accounting systems have their positive and negative sides. I previously defined what GAAP and IRFS are and provided some comparisons and differences regarding them. I’ve also listed a few pros and cons of the two frameworks. Last I gave the positives and negatives of the United States’ transition to IFRS from GAAP.
1. Ernst & Young. US GAAP vs. IFRS: The Basics. United Kingdom. Printing.
2. Forgeas, Remy. “Is IFRS so different from US GAAP?” IFRS resources. AICPA, n.d. Web. April 13, 2014
3. “GAAP vs. IFRS.” Difference and comparison. Diffen, nd Web. April 13, 2014
4. “Generally Accepted Accounting Principles (GAAP).” Business dictionary. Web Finance, nd Web. April 13, 2014
5. Ernst & Young. US GAAP vs. IFRS: The Basics. Great Britain, 2012. Print.
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