Analysis of IFRS and U.S. GAAP
GAAP or acronym for Generally Accepted Accounting Principles refers to the standard framework of guidelines for financial accounting used in any given jurisdiction. It is a common set of accounting principles, standards, and procedures that companies use to compile their financial statements (Investopedia). For many years, countries have developed their own accounting standards. The U.S. has always followed the U.S. GAAP while most European countries followed the IFRS, or acronym for International Financial Reporting Standard. In a sense, the U.S. had their own financial “language”, and in order to communicate with others, they needed to translate to a ...view middle of the document...
Today, the role of AICPA in standard setting has diminished, and instead a new standard-setting structure composed of three organizations – the Financial Accounting Foundation (FAF), FASB, and the Financial Accounting Standards Advisory Council (FASAC) was created.
GAAP is essentially a mixture of over 70 years worth of documents that have been developed over the years by all of the parties ever involved in standard setting. Historically, the documents that comprised GAAP varied in format, completeness, and structure, making it difficult to determine what was authoritative and what was not. In response to such concern, the FASB developed the Financial Accounting Standards Board Accounting Standards Codification, or “the Codification”. The primary goal of the Codification is “to provide in one place all the authoritative literature related to a particular topic. This will simplify use access to all authoritative U.S. GAAP” (Kieso, Weygandt, Warfield 14). Despite efforts made to improve its accessibility, the biggest issue with GAAP remains to be the fact that it is unusable in any other country than the U.S. Companies “outside of the United States often prepare financial statements using standards different from U.S. GAAP. As a result, international companies…have to develop financial information in different ways. Users of the financial statements often must understand at least two sets of accounting standards” (Kieso, Weygandt, Warfield 20) which can be difficult and very expensive.
Although GAAP is currently still accepted for international use, International Financial Reporting Standards (IFRS) issued by the London based International Accounting Standards Board (IASB) is in use by over 115 countries. While GAAP and IFRS have many similarities, FASB and IASB formalized their commitment to converge the two after their joint meeting in 2002 (www.ifrs.org). Progress since then have been steady and successful. In 2002 they issued their Norwalk Agreement in which they pledged to use their best efforts
1. To make their existing financial reporting standards fully compatible as soon as is practicable and,
2. To co-ordinate their future work programs to ensure that once achieved, compatibility is maintained (www.ifrs.org).
In 2006, a “Memorandum of Understanding” (MoU) between FASB and IASB was released outlining the priorities for the convergence project and specific milestones to be reached by 2008. The memorandum was based on three principles:
1. Convergence of accounting standards can best be achieved through the development of high quality, common standards over time;
2. Trying to eliminate differences between the two standards that are in need of significant improvement is not the best use of the FASB’s and the IASB’s resources – instead, a new common standard should be developed that improves the financial information reported to investors; and
3. Serving the needs of investors’ means that the Boards should seek...