International Financial Accounting Standards versus Generally Accepted Accounting Principles

Although we’ve known for centuries about the spherical dimensions of globes, recent decades have shown that the Earth might be “flat” after all. People communicate across the world like never before, allowing transactions to flow freely from one country to another. Because this is the first time this has ever happened in history, people are quickly adapting to new types of problems or ways we can make these interactions more efficient. One problem is that due to the free flow of business transactions through different countries and different law enforcement agencies, it is necessary to establish a set of accounting standards in order to have easier access to financial information. International Financial Reporting Standards are a set of accounting standards, established by the International Accounting Standards Board, which is becoming the global standard for the preparation of financial statements of public companies. The current lack of a uniform set of accounting standards creates problems for processing and user companies. Many multinational companies, creditors and investors support the idea of ​​a global set of accounting standards, which would make it easier to compare the financial statements of a foreign competitor, to better understand opportunities and reduce costs through the use of an accounting procedure. . wide.

Currently, more than 12,000 companies in 113 countries have adopted international financial reporting standards as their new accounting standards. The SEC believes that this number will continue to rise. Japan, Brazil, Canada, and the countries of India plan to start using IFRS in 2010 and 2011. Mexico will adopt IFRS in 2012. This same year, the US will include questions on IFRS in its CPA exams. President Obama released financial regulatory reform proposals on June 17, 2009, calling for accounting standard setters to “make substantial progress toward developing a single set of high-quality global accounting standards.” quality” by the end of 2009. They are expected to converge and/or adopt international standards, IFRS and stop using their generally accepted accounting principles, beginning in 2012. The proposed deadline, which requires US public companies to use IFRS, was postponed until 2015. To do this, the differences between GAAP and IFRS must be recognized and eliminated.

There are several main differences between GAAP and IFRS, which are causing substantial delays in their convergence. Some important distinctions between these two standards are that IFRS does not allow LIFO, uses a one-step method for impairment write-downs, has different rules for curing debt covenants, reports business segments differently, has different requirements of consolidation and is less broad guidance on revenue recognition than GAAP. These variations, at a minimum, should be studied intensively by the FASB to conclude extensive impacts on US companies.

The first big difference between these two sets of standards is inventory management. Currently, US GAAP allows FIFO, average cost, and LIFO costing methods for inventory. IFRS has prohibited LIFO and companies will have major changes in inventory valuation to adapt to the new standards. Also, GAAP does not specify special rules for livestock or crops, while IAS 41 specifies the use of fair value less estimated costs to sell for biological assets. Another important change in inventory accounting is that IFRS will present inventory at the lower of cost or net realizable value instead of market. IFRS will also require market adjustments or lower costs to be reversed under defined conditions, whereas US GAAP does not allow this reversal.

Second, IFRS have different measurement procedures for the impairment of goodwill and other long-lived intangible assets. US GAAP measures goodwill impairment through a two-step process that first compares the estimated fair value of the reporting unit to the carrying value of the unit. If the book value is greater than the fair value, goodwill is impaired and step two must be completed. In this next step, the fair value of the net identifiable assets is established and subtracted from the fair value of the reporting unit. The excess in the fair value of the identifiable net assets will be considered goodwill impairment. IFRS will not use this measurement process and will instead use a one-step calculation similar to other long-lived assets. This measurement for long-lived assets will be made with reference to the higher value in use or fair value less costs to sell. When this impairment is measured for long-lived assets (not goodwill), it is allowed to reverse under certain conditions under IFRS.

Third, GAAP and IFRS have different rules when it comes to curing debt covenant violations. When a debt covenant violation has occurred, it must be remedied before the year-end balance sheet date because, by international standards, it is not permissible after year-end. This will have a huge impact on how companies will finance their operations. There will be more pressure for companies to renegotiate their debt or they will have to raise capital through the issuance of their capital. Debt covenant violations will clearly show which companies are not financially sound and will continue to show problems in the future.

The last big difference between GAAP and IFRS is that the revenue recognition guidance is less extensive for IFRS. IFRS guidance on this topic fits into a book about two inches thick, while US GAAP has about 17,000 pages of standards and guidance. (IASB) One reason for this is that GAAP contains industry-specific instructions, for example, revenue generated from software development. IFRS have relatively few regulations on how specific industries recognize revenue. Some other differences between GAAP and IFRS are differences in reporting and segment consolidations.

Segment information differs slightly between the two standards because GAAP is flexible in how a company defines its segments through management approach. Internal management selects specific segments, even if they differ from the financial statements, when following GAAP, because these segments correspond to internal operations. IFRS will not allow the management approach, and the segments used must match the financial statements. IFRS No. 8 “Operating Segments” requires that reportable segments be disclosed in both annual and interim financial statements, which include both business and geographic segments. Another difference is that you will be required to have two different segmentation bases, a primary base and a secondary base.

Another distinction between these two standards is that consolidation will be handled differently. First, GAAP requires consolidation for majority owned subsidiaries, while IFRS will consider control as a factor for consolidation. Some other differences are that variable interest entities and rated SPEs have not been addressed by IFRS, parent and subsidiary accounting policies will need to be conformed, and minority equity interests will be required. When it comes to consolidating foreign subsidiaries, there are additional differences to consider. To consolidate a foreign subsidy, the parent company must receive foreign financial statements and comply with US GAAP prior to foreign currency conversion. This step will be eliminated and will facilitate this type of consolidation. However, more emphasis will be placed on the currency of the economy in which business is actually conducted in determining the functional currency, while GAAP is open to judgment with high regard to cash flows. And finally, under GAAP equity accounts are converted to historical value, but are not specified under IFRS.

There are many differences between U.S. GAAP and international financial reporting standards, including, but not limited to, topics such as inventory, impairment measurements, debt management, revenue recognition, segment reporting, and consolidation of assets. financial statements. With the determination of a set of reporting standards, the elimination of these differences will be evident through continued efforts between the FASB and the IASB. Most importantly, accountants in the United States must be prepared for this inevitable event, because after all, the world is flat.