US GAAP Vs IFRS: What are the benefits and differences?
Apart from other countries, the United States has always followed its own way of doing things. For example, the US was the only country to have a uniform color for its currency; green. However, other countries color code their currency to differentiate their denominations. Our green-colored dollar bill originated in the 19th century and up until the 2000s, we are now beginning to see US bills with multi-colored ink. Until the 2000s, the United States was stuck in its own ways and comfortable with its constant green currency until they realized that printing with multicolor ink would help differentiate their notes; all while other countries recognized this much earlier. Just as the United States had its own way of presenting our currency, the same goes for setting our accounting standards. The US has followed Generally Accepted Accounting Principles, or GAAP, as a means of presenting financial statements, while other countries follow International Financial Reporting Standards, or IFRS. Historically, the United States has been the most adamant in sticking to its own US GAAP, however, recently the Securities and Exchange Commission (SEC) agreed to the adoption and enforcement of IFRS in the US. The SEC has recognized the outpaced benefits associated with the use of equivalent accounting standards among all countries despite the differences between them.
As more and more companies are making the transition to a global economy, by adopting IFRS, all companies around the world will present financial statements on the same basis and rationale. This, in turn, will give US companies a competitive advantage over their foreign competitors, as the equivalent disclosure of companies’ financial performance will be more understandable and easier to compare for investors, companies and the general public. . As Professor David Albrecht points out, “If each country has a different set of financial standards, while multinational companies exist in different countries, it is difficult to compare the position of each company because there is no consistency. Consistency is a key factor in comparison of statements. IFRS will also make it easier for companies to initiate partnerships, implement cross-border acquisitions, and develop cooperative agreements with foreign entities. In addition, companies with subsidiaries in countries that require or allow IFRS may use one accounting language throughout the company. Companies may also need to convert to IFRS if they are subsidiaries of a foreign company that is required to use IFRS, or if they have a foreign investor that is required to use the international standard. Another apparent benefit of adopting this is that companies will have the advantage of raising their capital abroad. All of these advantages, plus many others, will greatly help a company’s position and overall performance in the global economy.
Although the change to IFRS will be beneficial to US companies, some people believe the change will put the US at a disadvantage because of the many differences between our current accounting principles and IFRS. To be clear, US GAAP is a codification of how CPA firms and corporations prepare and present their income, expenses, assets, and liabilities in their financial statements. It is not a single accounting rule, rather it is the accumulation of many rules on how to account for various transactions. When preparing financial statements using GAAP, most US corporations and other business entities use the many rules for reporting business transactions based on these various GAAP rules. The rules and procedures for reporting under GAAP are complex and have been developed over a long period of time. On the other hand, IFRS are considered a “principles-based” set of standards in the sense that they set out broad rules and dictate specific treatments.
There are specific differences in the two accounting standards. According to the IFRS website, the most significant difference between US GAAP and IFRS is that IFRS provides much less general detail. For example, its guidance regarding revenue recognition is considerably less extensive than US GAAP. IFRS also contain relatively few industry-specific instructions. Also, IFRS does not allow Last In First Out (LIFO); the only acceptable method of accounting for inventory is First In, First Out (FIFO). IFRS also uses a one-step method for impairment write-downs instead of the two-step method used with US GAAP, which makes write-downs more likely. The IFRS also does not allow debt for which there has been a covenant violation to be classified as non-current unless a waiver is obtained from the lender before the balance sheet date. To point out some other differences, US GAAP acquires intangible assets recognized at fair market value. By contrast, IFRS recognize intangible assets if it is probable that they will have future economic benefit and they are measured according to their reliability. In addition, US GAAP assigns costs to individual assets, whereas the initial measurement in IFRS is simply at cost (International Financial Reporting Standards).
From a general point of view, I think that US GAAP is calibrated to handle current financial situations and that IFRS is more oriented to focus on everything, leaning more towards a better financial future. I believe that despite these differences, the United States will benefit greatly when we adopt an international set of accounting procedures. Just as the US is now following other countries on currency differentiation, I think now is the right time to follow other countries and adopt internal accounting procedures.