Is it Time to Close the "GAAP" Between the United States and the World?
For many years here in America our businesses have been required to follow Generally Accepted Accounting Principles or GAAP. While the GAAP system has been fairly successful there has been a push to switch accounting systems. In August of 2008, The Securities and Exchange Commission said that they want to switch from GAAP to International Financial Reporting Standards or IFRS. IFRS is the accounting system that is used a majority of international countries. In fact according to IFRS.com over 100 countries have adopted IFRS rules. This move is considered by many to be one of the biggest accounting rule changes ever. Now why would the SEC want to switch from GAAP to IFRS? First let's take a look both GAAP and IFRS, to get a better understanding of them both. And then look at what are some of the differences, and why the SEC wants to make the switch.   Â
GAAP has been setting rules such as rules to prepare, and report financial statements for a wide variety of types of businesses. According to Accountingcoach.com there are three important set of rules which make up GAAP. These three set of rules are;Â the basic accounting principles and guidelines; the detailed rules and standards issued by FASB and its predecessor the Accounting Principles Board; and generally accepted industry practices. Now that we've looked briefly at GAAP, let's look at IFRS. Unlike GAAP, IFRS has not been around for a long time, it's quite the opposite. IFRS started in 2001, so it is still fairly young.
So why does the SEC want to make the switch from GAAP to IFRS? There are many reasons why they want to. One reason is that a global system for accounting would be very beneficial. With increase of technology and other factors the global market has been rapidly expanding. So now more than ever, the use of a global accounting system would be great. A global system would allow better information for those looking at financial statements from international countries. Companies would save both time and money, because they would not need to invest so much in interpreting and figuring out international companies' financial statements.
The switch would also have many benefits to capital markets. According to a presentation report given by Stephen G. Austin and Norbert Tschakert there are a wide variety of benefits to capital markets, one of the benefits being, enhanced worldwide comparability for investors, they are echoing the previous reason. Another benefit they say would be there would be more efficient capital allocations, and there will no longer be a need to develop and maintain national standards.
Stephen G. Austin and Norbert Tschakert also talk about how switching to IFRS will have benefits towards companies. They say it will be easier to do business overseas, which in turn could raise the amount of business done with international companies. They said that the move supports raising capital overseas and it makes for easier cross-border acquisitions.
Not everyone believes that the switch to IFRS will be this beneficial. According to a report Mind the GAAP: Analyzing the Proposed Switch to International Accounting Standards, based on what a Wharton accounting professor Luzi Hail said, the report said, "the benefits might be even more limited in the United States because --Â unlike some other countries that have adopted IFRS -- it already has a system of high-quality accounting standards. The IFRS standards are unlikely to significantly improve the reporting practices of U.S. companies, he notes, especially when the underlying incentives for accurate reporting -- such as market and regulatory pressures for transparency -- remain constant." Luzi Hail does not believe that the switch will be as beneficial as many other believe.
It is somewhat surprising that the SEC would consider making such a drastic change, especially when there has been a working system in place more many years. While there is no date certain as to when the switch will fully come into effect, it seems inevitable that eventually the US will adapt to the rest of the globe's accounting system of IFRS.
"Accounting Principles | AccountingCoach.com."Â Learn Accounting Online for Free | AccountingCoach.com. Web. 08 Nov. 2011. <http://www.accountingcoach.com/online-accounting-course/09Xpg01.html>.
AICPA | Www.IFRS.com - International Financial Reporting Standards Resources. Web. 08 Nov. 2011. <http://www.ifrs.com/index.html>.
Austin, Stephen G., and Norbert Tschakert. "Major Differences in U.S. GAAP & IFRS and Latest Developements." Lecture. Accounting Day. 18 May 2009. Web. 8 Nov. 2011. <http://www.swensonadvisors.com/assets/MajorDifferencesBetweenUSGAAPandIFRS.pdf>.
"Authoritative Source of Guidance."Â Fasab.gov. Web. 08 Nov. 2011. <http://www.fasab.gov/accounting-standards/authoritative-source-of-gaap/>.
"Mind the GAAP: Analyzing the Proposed Switch to International Accounting Standards."Â Knowledge@Wharton. Web. 08 Nov. 2011. <http://knowledge.wharton.upenn.edu/article.cfm?articleid=2192>.
"US GAAP & IFRS Convergence."Â PwC: Building Relationships, Creating Value. Web. 08 Nov. 2011. <http://www.pwc.com/us/en/issues/ifrs-reporting/ifrs-gaap-convergence.jhtml>.
GAAP has been setting rules such as rules to prepare, and report financial statements for a wide variety of types of businesses. According to Accountingcoach.com there are three important set of rules which make up GAAP. These three set of rules are;Â the basic accounting principles and guidelines; the detailed rules and standards issued by FASB and its predecessor the Accounting Principles Board; and generally accepted industry practices. Now that we've looked briefly at GAAP, let's look at IFRS. Unlike GAAP, IFRS has not been around for a long time, it's quite the opposite. IFRS started in 2001, so it is still fairly young.
So why does the SEC want to make the switch from GAAP to IFRS? There are many reasons why they want to. One reason is that a global system for accounting would be very beneficial. With increase of technology and other factors the global market has been rapidly expanding. So now more than ever, the use of a global accounting system would be great. A global system would allow better information for those looking at financial statements from international countries. Companies would save both time and money, because they would not need to invest so much in interpreting and figuring out international companies' financial statements.
The switch would also have many benefits to capital markets. According to a presentation report given by Stephen G. Austin and Norbert Tschakert there are a wide variety of benefits to capital markets, one of the benefits being, enhanced worldwide comparability for investors, they are echoing the previous reason. Another benefit they say would be there would be more efficient capital allocations, and there will no longer be a need to develop and maintain national standards.
Stephen G. Austin and Norbert Tschakert also talk about how switching to IFRS will have benefits towards companies. They say it will be easier to do business overseas, which in turn could raise the amount of business done with international companies. They said that the move supports raising capital overseas and it makes for easier cross-border acquisitions.
Not everyone believes that the switch to IFRS will be this beneficial. According to a report Mind the GAAP: Analyzing the Proposed Switch to International Accounting Standards, based on what a Wharton accounting professor Luzi Hail said, the report said, "the benefits might be even more limited in the United States because --Â unlike some other countries that have adopted IFRS -- it already has a system of high-quality accounting standards. The IFRS standards are unlikely to significantly improve the reporting practices of U.S. companies, he notes, especially when the underlying incentives for accurate reporting -- such as market and regulatory pressures for transparency -- remain constant." Luzi Hail does not believe that the switch will be as beneficial as many other believe.
It is somewhat surprising that the SEC would consider making such a drastic change, especially when there has been a working system in place more many years. While there is no date certain as to when the switch will fully come into effect, it seems inevitable that eventually the US will adapt to the rest of the globe's accounting system of IFRS.
Works Cited
"Accounting Principles | AccountingCoach.com."Â Learn Accounting Online for Free | AccountingCoach.com. Web. 08 Nov. 2011. <http://www.accountingcoach.com/online-accounting-course/09Xpg01.html>.
AICPA | Www.IFRS.com - International Financial Reporting Standards Resources. Web. 08 Nov. 2011. <http://www.ifrs.com/index.html>.
Austin, Stephen G., and Norbert Tschakert. "Major Differences in U.S. GAAP & IFRS and Latest Developements." Lecture. Accounting Day. 18 May 2009. Web. 8 Nov. 2011. <http://www.swensonadvisors.com/assets/MajorDifferencesBetweenUSGAAPandIFRS.pdf>.
"Authoritative Source of Guidance."Â Fasab.gov. Web. 08 Nov. 2011. <http://www.fasab.gov/accounting-standards/authoritative-source-of-gaap/>.
"Mind the GAAP: Analyzing the Proposed Switch to International Accounting Standards."Â Knowledge@Wharton. Web. 08 Nov. 2011. <http://knowledge.wharton.upenn.edu/article.cfm?articleid=2192>.
"US GAAP & IFRS Convergence."Â PwC: Building Relationships, Creating Value. Web. 08 Nov. 2011. <http://www.pwc.com/us/en/issues/ifrs-reporting/ifrs-gaap-convergence.jhtml>.