This paper will examine differences between the International Financial Reporting Standards (IFRS) and the US-based Generally Accepted Accounting Principles (GAAP). As part of this examination, three issues will be discussed. First, the main conceptual differences between the IFRS and GAAP approaches. Second, which of these two approaches best serves objectives of the Statements of Financial Accounting (SFAC) no. 8. Third, which of these two approaches best serves the small and medium-sized entities (SME). This paper will be divided into three sections corresponding to each of these issue areas.
Background. IFRS are issued by an organization formed in 2001 known as the International Accounting Standards Board (IASB). This organization was formed from the restructuring of an older precursor group known as the International Accounting Standards Committee (IASC). In general terms, the goals of both organizations were to promote the harmonization of accounting standards and principles among member countries (Aqel 2012, 85). IFRS is used widely in European Union member countries, although it's not limited to that region. More specifically, the goals of the IASB (Aqel 2012, 85) are to:
1) Develop a uniform set of standards. These standards would be of high quality, comprehensibility, and enforceability. They would also have acceptability in the international community.
2) Promote the widespread use and application of IFRS.
3) Account for the financial reporting requirements of emerging markets by formulating a group of IFRS targeted specifically on small and medium-sized entities (SMEs).
4) Accomplish the goal of converging the accounting standards of various nations and IFRS. Thus, there would only be one uniformed standard of accounting principles in use internationally.
GAAP is issued by the US Financial Accounting Standards Board (FASB). FASB provides financial information to investors and creditors who need consistent financial information to make investment decisions.
It should also be noted that the last several years have seen a movement towards a harmonization and simplification of global accounting standards. This movement is known as the convergence of international accounting standards. As such, the US Securities and Exchange Commission (SEC) has agreed to merge US accounting principles with those of IFRS (Aqel 2012, 84). It's expected this process will take years to complete, but it's already underway. The uniformity of accounting standards is welcomed as a good move by many investors. This is because differences in national accounting standards are considered a bar to the free flow of investment capital across national borders.
Indeed, until relatively recently, any firms seeking to invest in the US would have to convert their financial statements into the US GAAP format. This conversion can lead to substantial differences between accounting measures. An example of this is when Daimler-Benz applied for a listing on the New York Stock Exchange (NYSE) in 1993. When the firm undertook the conversion of its financial statements to comply with the US GAAP, a serious discrepancy was reported (Aqel 2012, 84). A profit of 615 million DM, a figure attained using Germany's accounting standards, became an 1839 DM loss after the GAAP conversion.
Thus, the harmonization of national accounting standards is intended to smooth out such differences. Also, the last 10 years have seen numerous widely publicized accounting scandals in the US (Aqel 2012, 87). It's believed that the use of the simpler IFRS format will make using manipulative accounting methods more difficult.
GAAP-IFRS differences. The generally accepted conceptual difference between the two accounting standards is that the US GAAP uses rules-based criteria. In contrast, IFRS is considered to be a principles-based criterion (Aqel 2012, 88). It should be noted, that a majority of the world's countries use the rules-based approach.
More specifically, the GAAP has been criticized as difficult to understand and cumbersome. This is because each set of criteria has too much detail. At the same time, not all writers agree that US GAAP is not generally rooted in principles (Aqel 2012, 86). The criticism arises because its components include detailed implementation guidelines that situate them within a rules-based practice. Many of these details focus on explanations of standards application and reportedly include numerical illustrations as examples (Aqel 2012, 86). It's been reported these details are included as a means to preempt lawsuits (Aqel 2012, 86). But another justification is that the detailed content provides greater comparability of various entities' financial statements (Aqel 2012, 86). Also, in the wake of the accounting scandals at Enron and other US firms, Sarbanes-Oxley (SOX) legislation required the SEC to investigate the adoption of principles-based accounting criteria.
As noted above, IASB issuance is considered to be principles-based. Principles-based standards focus on a conceptual framework. Thus, in lieu of issuing detailed rules, this framework provides guidelines with flexibility for preparers of financial statements (Aqel 2012, 88). When employing principles-based accounting the conceptual basis, and general basic understandings, supersede detailed rules. As noted, they provide flexibility, in that they allow choices to statement preparers between two or more options.
As an example of these differences, IASB includes six broad pronouncements and one interpretation that addresses the topic of leases. In contrast, FASB issuance includes seventy-eight pronouncements along with a number of different interpretations. The next section will discuss which of these two rules best serves the objectives of SFAC 8.
SFAC 8 was issued by FASB in Fall 2010. The issuance concerned the goals of financial reporting and also the qualitative aspects of financial statement reporting. It replaces two earlier statements, SFAC 1 and 2, which previously dealt with these issues. SFAC is reportedly much more succinct in terms of content than its two predecessors. It also indicates the progress FASB is making on its Conceptual Framework Project (Hales 2010). This project is aimed at providing uniform accounting standards using principles-based criteria. Thus, the IFRS approach best serves the objectives of SFAC 8.
Unlike GAAP, IFRS has issuance that is specifically targeted on SMEs. SMEs are organizations that are not publicly accountable and publish general purpose financial statements. These financial statements are available for external users (Oestriecher 2012, 8). Until relatively recently, non-public companies were required to use the identical reporting standards that public companies must use. This is particularly true when reporting financial information under GAAP guidelines. IFRS has issued its IFRS for SMEs. This guidance allows small and medium-sized companies to use reporting standards specific to those businesses (Oestriecher 2012, 1). This also has the net effect of reducing costs associated with financial reporting for SMEs as well. Thus, the IFRS approach best serves the SME community.
Aqel, S. "The IASB and FASB Convergence Process: Current Developments." Acta Universitatis Danubius Oeconomica, 8,2 (2012): 83-105.
Hales, Jeffrey. "FASB Issues SFAC 8." Fasri.net, Oct. 2, 2010. Web. http://www.fasri.net/index.php/2010/10/fasb-issues-sfac-8. Nov. 2013.
Oestriecher, Kurt G. "Emerging Financial Reporting Standards (Alternatives to U.S. GAAP)." GSCPA.org, 2012. Web. http://www.gscpa.org/Content/Files/Conference%20eMaterials/2012%20SEAS%20Session/H1%20-%20Outline.pdf. Nov. 2013.