Table of Contents
Accounting is a very complex activity, which requires unity of all involved parties in order to receive converged and well-matched results. In order to accomplish the goal of having the same way of preparing and presenting the financial statements, there is a need to develop mutual role and objectives. There exist certain bodies responsible for designing such principles and it is recommended that many countries adopt such rules. IFRS and GAAPs are the accounting principles that companies use while preparing their statements. GAAPs are based in the United States, while the IFRS are used in most European Union countries and other 110 countries worldwide (IASB, 80). IASB is the authorized body that prepares the principle in IFRS and is designed to change and implement them in accordance with the market structure. All of such areas have their history of development and differences. The IFRS has its current status and the future perspective, which it wants to achieve in the coming years (FASB, 705-740). Current paper discusses in details the nature and perspectives of such accounting principles and their designing bodies.
History of IASB and International Financial Reporting Standards (IFRS)
In the late 1950s after the World War II, cross-border countries engaged themselves in trade where they exchanged goods and services for money. However, despite such trading, the companies worked in a very local manner where the books of accounts from a client of a particular country were different from the ones in a cross-border country. Major capital markets in the world had the need to have similar or identical principles that would guide them in the accounting process. In the need for harmonization of such accounts in the capital markets, an International Accounting Standard Committee (IASC) was formed in 1973, which designed the codes. In 1990s, the term harmonization was changed to convergence that resembles the accounting field, as well as an accounting term. The year 2001 was a great year in the accounting where the convergence principle was recognized. An international accounting standards board was designed in the year 2001, and it is taking effect in the accounting field nowadays. More than a hundred countries and the European Union permitted the use of International Financial Reporting Standards, which originates from IASB.
Between the year 1973 and 2001, IASC issued the International Accounting Standards (IAS) which are the codes of ethics for accounting. After 2001 IASC had changed to IASB and the term and initials IAS were changed by the board. Though the standards are still called IAS, the official term concluded was International Financial Reporting Standards (IFRS).
Examples of Differences in GAAPs and IFRS
General Accepted Accounting Principles (GAAPs), are accounting principles and standards used mainly in the United States. Though they perform the same activities, GAAPs and IFRS has some differences. Such differences include:
|1||Under current framework, some assumptions, like going concern, are not fully developed.||There are strong positions in most of the assumptions, which are well-defined. The assumptions include accruals and going concern (FASB, 305-360).|
|2||The concept is mostly used in the United States.||IFRS’ concept is used by more than 110 countries. It is also adopted by the countries in the European Union.|
|3||In the statements of financial position, current framework gives the asset a definition of future economic benefit.||IFRS has different definition of an asset where it is described as the arena from which the benefits will flow to the company (IASB, 170).|
|4||The primary qualities of the statements prepared according to the standards are reliability and relevance. The secondary quality is the comparability where understandability is described as the quality of specific user (FASB, 705-740).||IFRS has a different view where it states that its decisions cannot be based or followed by the trend of a specific user decision.|
|5||The platform provides separate and different information for the usage by non-business and business entities.||IFRS does not have separate objectives and the final statements issued or prepared are used in both business and non-business entities.|
|6||In the GAAPs, the concept of inventory reversal is prohibited.||In the IFRS, the concept of reversal in inventory is sometimes permitted but under certain criteria.|
|7||The GAAPs main objective is to provide the structure to assist in the typical financial accounting.||IFRS helps the international businesses to converge, understand each other and work together.|
Current Status of IFRS and US Financial Reporting
In the US financial reporting, IFRS is not yet fully adopted and the organizations prefer using GAAPs. The platform is entering the organizations, though at a slow pace. However, in other parts of the world, the principles are in operational and convergence of the financial statements across borders takes the form of IFRS. In the G20 countries IFRS is used, where more than other 100 countries are permitted and restricted to using the principles. GAAPs are very dominant in the United States where all the organizations use such system. However, between the year 2007 and 2012, Securities Exchange and Commission (SEC), and provided guidelines that preparation of the financial statements in the stock exchange works according to IFRS (FASB, 705-740). The procedure called to make the method effective is still developing and the incorporated changes will take effect in the future. If the government and the financial boards refuse to enhance or implement the SEC proposal, the companies will continue operating under GAAPs.
The Future of IFRS and US Financial Reporting
The future of IFRS and the US financial reporting remain uncertain to many public companies. Many countries have adopted IFSR. However, the US is hesitant to adopt such model of global financial reporting. IFSR is considered costly, and most companies might not be able to afford it. The standards produced by IASB are of high quality, but they require further development (IASB 80). The US financial reporting system is expected to become global in the future. Many shareholders think that becoming global is an important factor for their company and it will be combined with the international financial reporting systems.
Adoption of IFRS in the United States has been postponed due to lack of funds. The funding for IFSR is expected to increase in the future. It is expected that IFSR will receive funding from a foreign subsidy, the Congress and seven largest accounting firms. IFSR will institute measures that will safeguard the US capital markets. In the United States, IFSR will focus on developing global financial language that will result in a transparent, high-quality and comparable international financial reporting system. Many companies in the future will adopt IFSR as it helps organizations compare financial report globally. In addition, it will become easier for such companies to trade in the global perspective.
By the passage or acceptance of the law introduced by SEC between the year 2007 and 2012, the United States will adopt the use of IFRS. Anyway, in case the Government or the American Accounting Association Department refuses to implement the above-provided accounting principles, there remains a possibility that IFRS will never be adopted in the US (IASB, 170). The dominance of the GAAPs creates no other option than to implement it and abide by the established rules. In accounting and convergence of the books of accounting and records, the United States cannot be compared to any other countries.