The wave of globalization has created a scenario whereby modern economies are engaging in transactions that support the flow of capital internationally. The percentage of cross-border financial practices and activities has increased steadily over the years. In the past, the existing national accounting procedures complicated such international initiatives, thereby making it impossible for multinational companies to achieve their objectives in a timely manner.
Most of the presented financial reports were complex and incapable of presenting reliable or uniform information to all potential global investors. The introduction of internationally accepted accounting standards is an evidence-based approach that can ensure that all processes and practices remain transparent, efficient, and capable of meeting the needs of all combination entities, investors, and creditors across the world. This paper gives a detailed analysis of the current international accounting standards, their similarities and differences, and their relevance for both investors and creditors.
IFRS and US GAAP: Differences
International Financial Reporting Standards (IFRS) are guidelines presented by the International Accounting Standards Board (IASB) and the IFES Foundation. Such standards offer a common language for financial operations and business affairs in an attempt to ensure that organizational accounts and annual reports are relevant, comparable, and meaningful at the global level (Popatia, 2017).
The implementation of such streamlined principles is something that has supported international trade and shareholding activities. Accountants and auditors should be aware of these standards in order to maintain financial books effectively and achieve their objectives (Guillaume & Pierre, 2016). The U.S. Securities and Exchange Commission (SEC) adopts and supports the use of the Generally Accepted Accounting Principles (US GAAP). Although these guidelines have significant similarities and differences with the IFRS, the two have continued to coexist.
Business leaders and investors should be aware of the striking differences between these two guidelines in order to manage their international and local corporations firms effectively. The first difference is that IFRS is an internal framework while the US GAAP is local in nature. The second one is that of principles and rules. For the US GAAP, a rule-based and research-oriented model has to be considered.
The IFRS guideline examines the overall patterns in accordance with the outlined principles. The third difference arises from the implemented or applicable inventory methods (Guillaume & Pierre, 2016). For IFRS, the Last In, First Out (LIFO) method is not permitted since it fails to reflect the right flow of inventory in most cases. The GAAP uses the LIFO model for estimating and monitoring inventory.
The fourth difference is that the IFRS allows the capitalization of an organization’s development cost in an attempt to leverage depreciation. Under GAAP, such costs will usually be expensed whenever they occur and should not be capitalized. The fifth one is that the IFRS method considers intangible assets that can have future economic value or benefits. The GAAP model only recognizes them at the fair market (Fajardo, 2016). The sixth difference is that IFRS allows accountants to include unusual occurrences or items in the income statement, while the GAAP only outlines them below the income section of the financial report.
Another disparity revolves around the position and handling of fixed assets. For instance, the GAAP system values them in accordance with the cost model. This strategy considers the historical value of different items and subtracts the accumulated amount of depreciation. The IFRS system appreciates the concept of revaluation, whereby the fair value of every asset is considered. The final difference is associated with the manner in which quality characteristics influence accounting functions. The GAAP operates within a defined hierarchy of elements to deliver relevant decisions, such as comparability and reliability (Guillaume & Pierre, 2016). With IFRS, those involved will focus on similar characteristics without examining individuals’ decisions.
IFRS: Advantages and Disadvantages
The IFRS system has several advantages that make it internationally acceptable and capable of meeting the needs of many investors. Firstly, such principles promise more comprehensive, timely, and accurate financial statements that are useful to all businesspeople. Secondly, the model promotes harmonization, thereby reducing the need for analysis and adjustment. Thirdly, IFRS makes it possible for people to recognize the timeliness at which a specific company made losses. Fourthly, it increases the levels of efficiency and transparency. Fifthly, the IFRS system improves the level of comparability of financial records and statements at the international level.
Sixthly, the model promotes uniformity in an attempt to minimize barriers to trade (Fajardo, 2016). Seventhly, this technique is known to improve transparency and consistency in the manner in which financial reporting is done. Finally, it has improved or streamlined accounting practices across the globe. This development has resulted in a scenario whereby investors can identify and study global markets before making appropriate decisions.
However, there are specific disadvantages associated with the IFRS accounting system. The first one is that it might be impossible to make it a global common practice due to the training costs required and the presence of internal systems in different countries. The second issue many stakeholders consider is that the IFRS model does not recognize extraordinary gains and losses. The third challenge associated with this accounting system is that it is quite complex and costly to implement (Fajardo, 2016).
This issue explains why it might be unavailable for medium-sized and small business entities. The fourth concern is that the IFRS results in manipulation and affects the quality of the presented financial reports. Finally, additional disclosures tend to be stricter or longer. This means that companies and auditors might have to incur numerous expenses to produce them.
Importance of Wholly Accepted International Standards
The lessons and insights observed from the adoption of national accounting systems explain why there is a need for a recognized uniform international model. Ortega (2017) indicates that the absence of such a framework supports the presentation of financial statements calculated on different platforms. This becomes something complicated for accountants, investors, and auditors. These issues and challenges explain why there is a need for a wholly accepted international standard.
Such a model is necessary as it will improve the level of transparency in international financial reporting. This strategy will ensure that market participants, investors, and business leaders are in a position to make informed choices. The introduction of the proposed framework is essential since it will increase accountability. This means that regulators across the globe will monitor and examine financial records with ease and achieve their goals (Guillaume & Pierre, 2016).
The adoption of a standardized international accounting and reporting procedure will maximize the efficiency of the global economy. This is the case since all potential investors will identify risks and opportunities that exist in different regions. This knowledge will reduce most of the reporting costs many corporations incur. Due to globalization, there is a high probability that a uniform standard will create the best environment for engaging in international business, supporting decision-making processes, and minimizing discrepancies (Ortega, 2017). These developments and gains explain why there is a need for the international market to consider the benefits of a uniform international standard for accounting and auditing purposes.
Upcoming Convergence to IFRS in the US
For many years, many professionals in the field of finance have remained optimistic that the Securities and Exchange Commission (SEC) would guide the US to adopt the International Financial Reporting Standards (IFRS). This means that such a move will result in the abandonment of the U.S. GAAP (Fajardo, 2016). The latest report by SEC Chairman indicated that American public companies would not use IFRS in the near future.
Despite the increasing pressure from international organizations and countries, the Financial Accounting Standards Board (FASB) has remained reluctant to adopt a new model of accounting. In 2007, the SEC made a second decision after the occurrence of the infamous financial crisis (Popatia, 2017). While it had outlined its desire to embrace the IFRS, the SEC remained adamant, and its interest waned. The 2012 report by SEC outlined some of the key challenges associated with the adoption of the IFRS instead of focusing on the possibility of embracing such standards or guidelines locally.
In 2016, a report released by SEC indicated that there was a need for the US to focus on a better, high-quality, and acceptable accounting standard that resonated with the international business needs. The latest document tabled by the American Institute of Certified Public Accountants revealed that the US was not focusing on the IFRS for its multinational and public companies (Fajardo, 2016). This is a clear indication that there is no anticipated convergence to IFRS in the US.
Business Combinations and Partnerships
There are significant differences between IFRS and US GAAP in regard to the accounting for partnerships and business combinations. Firstly, the US GAAP identifies business combination in accordance with ownership. For example, over 50 percent of voting shares mean that there is an aspect of consolidation (Popatia, 2017). With the IFRS, an investor is expected to control the investee and has the ability to affect returns. When there is acquisition, liabilities, and assets have to be recorded at fair value in accordance with IFRS (Ortega, 2017). This is different under GAAP since an irrevocable option is evident whereby the acquiree can consider a new form of accounting. When it comes to pushdown accounting, the IFRS system is usually silent and fails to provide clear guidelines.
The IFRS goes further to allow measurement period adjustments to be made by examining the prior period, while the GAAP model permits accountants to make adjustments by examining the time in which such changes are determined (Popatia, 2017). This means that IFRS is the only method that requires such adjustments to be pursued in a retrospective manner. These differences are, therefore, critical for those who engage in accounting for business combinations.
From this analysis, it is agreeable that the IFRS model is advantageous to any business combination entity. This happens to be the case since the standard allows companies from different regions to collaborate and pursue uniform accounting procedures. The corporations will also compare their assets and capital trends, thereby being able to make suitable decisions (Ortega, 2017). They will also raise adequate capital and make additional cross-border investments and acquisitions. The application of shared standards will make it easier for the targeted business entity to consolidate its foreign subsidiaries and eventually achieve the targeted economic aims.
Investors and Creditors
The outstanding observation from this analysis is that a standard accounting approach utilized by all organizations can create the best environment for decision-making and pursuing investment options. Due to the global nature of economic activities and business goals, IFRS emerges as the most advantageous framework for investors, creditors, and lenders. This is the case since such a model allows such stakeholders to get accurate, timely, and satisfactory information. The levels of comparability and transparency tend to increase when a uniform method applicable in many countries is put in place (Popatia, 2017).
This means that it promotes a convergence towards an acceptable and high-quality reporting framework. Such a system will allow them to make accurate and informed investment choices and eventually achieve their objectives.
The above discussion has indicated that many countries have appreciated and implemented the use of the IFRS. This international accounting system has made it easier for international investors and business leaders to make timely decisions, compare their financial records, and record positive outcomes. Unfortunately, the US has not appreciated the importance of allowing its public companies to utilize a wholly acceptable international accounting framework. The introduction of such standards can, therefore, become an evidence-based approach for ensuring that all processes and practices remain transparent, efficient, and capable of meeting the needs of all stakeholders.
Fajardo, C. L. (2016). Convergence of accounting standards world wide – An update. Journal of Applied Business And Economics, 18(6), 148-160.
Guillaume, O., & Pierre, D. (2016). The convergence of U.S. GAAP with IFRS: A comparative analysis of principles-based and rules-based accounting standards. Scholedge International Journal of Business Policy & Governance, 3(5), 63-72. Web.
Ortega, X. (2017). A review of IFRS and U.S. GAAP convergence history and relevant studies. International Business Research, 10(9), 31-38. Web.
Popatia, K. (2017). IFRS & GAAP: Reconciling differences between accounting systems and assessing the proposed changes to the IFRS constitution. Northwestern Journal of International Law & Business, 38(1), 137-159.