Combining Accounting Standards: GAAP and IFRS

The United States’ economy is constantly trying to learn from past mistakes on how to prevent future problems because the citizen’s depend on a reliable market to invest in and operate businesses. The stock market crash of 1929 was a harsh lesson for the government and business world since it showed there was a lack of organization and accountability between companies. GAAP is comprised of regulations businesses must follow in order to accurately record financial information. Some of the procedures included in GAAP are how to account for profitability, full disclosure of information, and matching principles and are important because they allow for people to understand the information they are receiving form a business and also compare it to another company’s statements because they use the same standards.

IFRS, International Financial Reporting Standards, is similar to GAAP but is accepted around the globe between international companies. Originating from London, IFRS is required in over 100 countries and not in the U.S. Since there are an overwhelming amount of similarities between GAAP and IFRS, there has been discussion of bringing the two together and creating one mass set of standards for everyone to follow. Combining the two methods would definitely make things easier for accountants and investors but a lot of changes would have to be made such as changing the study and testing material for accounting majors and requiring current accounts to learn how to apply the newly tweaked standards. The debate is whether the outcome of one ultimate guideline is worth the time, effort, and money needed to make this transformation to occur.

When the stock market crashed in 1929, the government realized the economy needed structure and guidance so investors would refrain from doing whatever they please with the money they were in charge of investing. The response was the creation of two Securities Acts between 1933 and 1934 that ended up establishing the Securities and Exchange Commission (SEC). The SEC sets the requirements businesses must follow in order to record and report their finances to the public. Generally Accepted Accounting Principles (GAAP) is a mixture of requirements and guidelines corporations in the United States must follow to be considered a legitimate business. Over the years, updates and new standards have been added to GAAP so it applies to modern day problems the business world faces (Zeff).

Although IFRS and GAAP are similar, the largest difference holding back the converging of the two into one method is IFRS consists of principles that are open to interpretation and not as detailed as rules under GAAP. The United States GAAP is made up of 17,000 pages of rules that intimately define what is expected of businesses (Pratt). In contrast, IFRS has only a fraction of that amount totaling around 2,500 pages and this leads to concern because it appears too vague compared to GAAP. It must be decided which method is more useful to consumers and investors so they can be combined without losing the benefits each method contains.

An international set of standards for companies to work with has been a slowly blossoming idea that has grown from only eliminating the main differences between methods into converging them into one universal grouping of rules and principles. This concept first appeared just before the 1960s and concentrated on harmonizing, or “reducing differences among the accounting principles used in major capital markets around the world” (“International Convergence”). Almost 40 years later this process was changed into finding a way to combine the major differences so a the set of standards would become brand new as opposed to being manipulated to fit the standards our country is comfortable following.

It is not a question of if there will one day be an international set of standards the business world will follow, but of how the two can be successfully changed and when the U.S. economy will be ready to accept new rules. Many countries have already switched over to IFRS, as recently as 2011, and more are predicted to change their methods in the near future (Pratt). The U.S. needs to begin focusing on how to prepare themselves for change by teaching IFRS methods in schools and having companies start adapting to principles from IFRS.

Source by Rachel Alexandra Smith

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