Question

GAAP is the accounting standard used in the US, while IFRS is the accounting standard used in over 110 countries around the world. GAAP is considered more rules based and IFRS is more principles based. Which standard do you feel is best suited for the US and if the SEC decides to switch over to IFRS how will that affect US companies?

Answer 1

IFRS are accounting standards developed by the IASB. The IASB is an independent accounting standards setting body consisting of various member countries including the United Stated. IFRS are becoming the global standards for preparation of publicly held company financial statements.

IFRS use a principle based approach whereas rules based approach is used under U.S. GAAP. The biggest difference between GAAP and IFRS is that IFRS provides less overall detail and less industry specific guidance. It is for this reason that many believe that the adoption of IFRS could lessen the quality of current financial reporting. In response, the FASB is working diligently on the convergence of US GAAP and IFRS.

Ready or not , the requirement for the U.S. companies to comply with new international accounting standards is rapidly approaching. Over the last several years there has been a huge push in the accounting world to implement the use of International Financial Reporting Standards. There has been a recent push for companies located in the United States and other nations to present financial statements on the same basis so that making comparisons will be easier.

The financial world wants standards that will provide for consistency in reporting no matter where a particular company is domiciled.As a consequence, the U.S. Financial Accounting Standards Board has a wide range of joint projects currently in process with the International Accounting Standards Board to assist in creating the desired consistency.

If SEC decides to switch over to IFRS the following can be the affect on the US companies:

For investors, the new standards will require an adjustment in how they interpret earnings numbers. For government, it will require ceding some regulatory power to an international body.

Although there is much discretion in U.S. GAAP and IFRS, there are some marked distinctions that will force different treatments on U.S. companies, or make new methods available to U.S. firms.

For investors, the new standards will require an adjustment in how they interpret earnings numbers. For government, it will require ceding some regulatory power to an international body.

Inventory Valuation Conventions

Both GAAP and IFRS allow First In, First Out (FIFO), weighted-average cost, and specific identification methods for valuing inventories. However, GAAP also allows the Last In, First Out (LIFO) method, which is not allowed under IFRS. Using the LIFO method may result in artificially low net income and may not reflect the actual flow of inventory items through a company

Inventory Write-Down Reversals

IFRS gives management more discretion in the area of asset valuation as a whole discretion that is also likely to increase company income. In the area of research and development costs and the related area of homegrown intangible assets valuation, IFRS is more generous than U.S. GAAP.

Additionally, under U.S. GAAP, writing assets down due to “impairment” (i.e., permanent decreases in value), is a one-way process. Once written down, there is no way that an asset can be written back up, even if economic or industry circumstances improve. IFRS, on the other hand, does allow write-ups, and allows them to benefit income.