Globalization has had a major impact on the way accounting is practiced around the world. The reason for this is that the laws are diverse in each and every country. US accountants must follow Generally Accepted Accounting Principles (GAAP). Worldwide, there are currently more than 115 countries that use International Financial Reporting Standards. Due to globalization, the Securities and Exchange Commission (SEC) has planned for all US companies to use IFRS by 2015. (Kieso)
Accountants understand that global companies will best benefit from a single set of accounting standards. The Financial Accounting Standards Board, a major source for documents found within GAAP, and the International Accounting Standards Board, by which IFRS were issued, have stated that they will begin to merge GAAP and IFRS through the issuance of a memorandum of understanding. This is often referred to as the Norwalk agreement, and it states that the two Boards will: make their existing financial reporting standards fully compliant as soon as possible, and coordinate their future work schedules to ensure that once achieved, it is maintained. compatibility. (Kieso) This merger of accounting standards will not be as easy as said considering that GAAP and IFRS contain some important differences.
The first big difference between GAAP and IFRS is that GAAP is considered “rule-based” and IFRS is considered “principle-based.” The fact that GAAP is considered rule-based means that the research focuses more on the literature and the principle-based concept of IFRS focuses on the review of fact patterns. In a principles-based accounting system, areas of interpretation or discussion can be clarified by the board that sets the standards and provides fewer exceptions than a rules-based system. (Forgeas) The SEC is trying to strike the right balance between “educated” professional judgment and “guessed” professional judgment. (Forgeas) As long as these two sets of standards exist, the same accounting situation can be performed in different ways, which will influence the legitimacy of the financial statements. For example, GAAP follows the LIFO and FIFO methods to calculate inventory costs, but IFRS only follows the LIFO method. Assigning different methods to practice will certainly change the way financial statements are interpreted; influence the judgment of external users who view financial statements.
Other problems also arise from the conceptual differences of GAAP and IFRS. Some of these issues are how the income statement, earnings per share, development costs, and intangible assets are reported. Under GAAP, extraordinary items are shown below net income, but under IFRS, extraordinary items are not segregated in the income statement. Under GAAP, earnings per share are calculated by averaging the incremental shares of the individual interim period, but IFRS does not take an average. Development costs are considered expenses under GAAP, but can be capitalized using IFRS development costs. (Forgeas) Intangible assets are only recognized if the asset will have a future economic benefit and has measured reliability according to IFRS, but when it comes to GAAP, intangible assets are recognized at fair value. (Nguyen)
Globalization has caused these problems to occur, because there are numerous companies that are expanding their operations to other nations. Companies in the US are offshoring to other countries to cut costs and decrease the amount of regulations they must follow. The convergence of GAAP and IFRS is extremely important so that those business transactions can be properly reported. This brings up another problem; What about the education required to implement so many changes in accounting standards? There are approximately more than 650,000 Certified Public Accountants (CPAs) in the United States; which means that they would need to be slightly reeducated to practice GAAP and IFRS convergence. (Harper) Re-educating thousands of people will be extremely expensive and, in most cases, will not depend on the individual person paying for the training; most likely this cost will be added to the expenses of the companies. After training, companies will still need to transition to the new reporting method; several departments will need to change their processes. Again, these modifications are always easier said than done and will take time to complete.
This list of how globalization affects accounting standards and the differences between GAAP and IFRS is certainly not exhaustive, but it shows the great impact it has. Although it can be difficult to converge the two sets of standards, it is certainly better to make a single set of standards to be used in a potentially global aspect. In conclusion, the transition process will take time to discover the probabilities and purposes of how to report specific financial statements, but it will be an improved way of conducting business internationally.
Forgeas. (North Dakota). AICPA | http://www.IFRS.com. Retrieved April 13, 2015.
Harper. (North Dakota). Retrieved April 13, 2015.
Kieso, D. and Weygan, J. (2013). Intermediate accounting (15th ed.). Hoboken, NJ: Wiley.
Nguyen. (2010, January 13). What are some of the key differences between IFRS and US GAAP? Retrieved April 13, 2015.
