The Transition from GAAP to IFRS

The United States, for some odd reason, has always had its own way of doing things. For example, it is the only country which uses feet and miles as opposed to meters and kilometers. With this in mind, the same goes for accounting. The U.S. has followed Generally Accepted Accounting Principles, or GAAP, as opposed to the rest of the world which follows International Financial Reporting Standards, or IFRS. However in recent years, corporations in the U.S. have started to adopt methods from IFRS and will actually be transitioning fully to all of those principles around 2016. But how is this transition going to affect these various businesses and corporations? How tough will this transition be? Throughout this essay, these questions will be answered but first some history of GAAP and IFRS.

GAAP was created by the Financial Accounting Standards Board (FASB) in 1973. This creation works in accordance with the AICPA’s (American Institute of Certified Public Accountants) Code of Professional Conduct, requiring members to provide financial statements free of unqualified opinions. In short, GAAP guidelines provide publicly traded and privately held firms the various methods considered appropriate for conducting accounting business. They consist of assumptions, principles, and constraints that are the basic “building blocks” of the whole idea of GAAP.

Similarly, IFRS was created by an accounting board called the International Accounting Standards Board (IASB) in 2001. They were basically a continuation of the International Accounting Standards which were the original principles created by IASB. IFRS has assumptions, principles, and constraints just as GAAP; however they are much more basic and open to interpretation.

To answer the first question, the transition will have numerous effects on people and corporations at different levels. One significant difference between GAAP and IFRS rests in the amount of detail each go into in explaining various principles. GAAP has three volumes totaling about eight inches of reading, as opposed to IFRS which uses about two. Restrictions and rules are more open to interpretation, making them more unclear. Those which have little to no experience with international companies will have to spend significant amounts of time and money on adopting these new principles. Also, their clients will have to be taught at least the basics of the new system in order to understand how the money that they own is being spent.

Not only will business and corporations have to train their employees, but higher-level education courses will also have to be changed. Colleges and institutions will have to modify courses that are offered in order to provide students adequate and up-to-date information. They must reinforce the international standards because they will be more beneficial in their post graduate years. If colleges and universities fail to do this, there could be a significant impact on upcoming college graduates.

To answer the second question, it all depends on how involved the company is with financial statements and GAAP. For example, IFRS uses a single-step method for impairment write-downs rather than the two-step method used in GAAP, making write-downs occur more often. Write downs are a negative aspect of a company because they make the company appear to be more profitable. This results in problems with the comparability and reliability of financial statements. Another involvement factor is regarding revenue recognition. IFRS contains broad industry-specific instruction and is less extensive then GAAP. There are more accounting methods used in revenue recognition, again allowing companies to choose the one that looks the best for their company.

In conclusion, there are many positive and negative aspects of IFRS. More than one hundred countries currently follow those standards, creating a global standard. It seems as though slowly but surely, the U.S. will make the transition from GAAP to IFRS. With the larger companies in the United States starting to convert to those standards, the smaller companies are soon to follow. It would not be surprising to see the U.S. implement IFRS in the near future.

Written by Darrell Sooy