Globalization has had a huge impact on the way accounting is practiced around the world. The reason for this is that the laws are diverse in each and every country. American accountants must follow Generally Accepted Accounting Principles (GAAP). Worldwide, there are currently more than 115 countries using the International Financial Reporting Standards. Due to globalization, the Securities and Exchange Commission (SEC) has planned for all US companies to use IFRS by 2015. (Kieso)
Accountants understand that global businesses will best benefit from a single set of accounting standards. The Financial Accounting Standards Board, one of the main sources of the documents found within GAAP, and the International Accounting Standards Board, which issued IFRS, have stated that they will begin to merge GAAP and IFRS through issuance of a memorandum of understanding. This is often known as the Norwalk agreement and provides that the two Boards will: make their existing financial reporting standards fully compatible as soon as possible, and coordinate their future work programs to ensure that, once achieved, they are keep compatibility. (Kieso) This merger of accounting standards will not be as easy as claimed considering that GAAP and IFRS contain some important differences.
The first big difference between GAAP and IFRS is that GAAP is considered “rules-based” and IFRS is considered “principle-based.” The fact that GAAP is considered rule-based means that research is more focused on the literature and the principle-based concept of IFRS is focused on reviewing fact patterns. In a principles-based accounting system, areas of interpretation or discussion can be clarified by the standard-setting board and provide fewer exceptions than a rules-based system. (Forgeas) The SEC is trying to find the right balance between “educated” professional judgment and “guessed” professional judgment. (Forgeas) As long as these two sets of standards exist, the same accounting situation can be realized in different ways, which will influence the legitimacy of the financial statements. For example, GAAP follows the LIFO and FIFO methods to calculate inventory costs, but IFRS only follows the LIFO method. Granting the practice of different methods will certainly change the way financial statements are interpreted; influence the judgment of external users viewing the financial statements.
Other problems also arise from the conceptual differences of GAAP and IFRS. Some of these issues are how the income statement is reported, earnings per share, development costs, and intangible assets. Under GAAP, extraordinary items are shown below net income, but under IFRS, extraordinary items are not segregated on the income statement. Under GAAP, earnings per share is found by averaging the individual interim period incremental shares, but IFRS does not take an average. Development costs are considered expenses under GAAP, but using IFRS development costs can be capitalized. (Forgeas) Intangible assets are only recognized if the asset will have future economic benefit and you have measured reliability under IFRS, but when it comes to GAAP, intangible assets are recognized at fair value. (Nguyen)
Globalization has caused these problems to occur, because there are numerous companies expanding their operations to other nations. Businesses in the US are offshoring to other countries to cut costs and lessen the amount of regulations they must follow. The convergence of GAAP and IFRS is extremely important so that those business transactions can be reported correctly. This brings up another problem; What to say about the education necessary to implement so many changes to accounting standards. There are approximately more than 650,000 Certified Public Accountants (CPAs) in the United States; which means they would need to be slightly re-educated to practice the convergence of GAAP and IFRS. (Harper) Re-educating thousands of people will be extremely expensive, and in most cases it won’t come down to the person paying for the training; most likely, this cost will be added to the expenses of the companies. After the training, companies will still have to transition to the new reporting method; multiple departments will need to change their processes. Again, these mods are always easier said than done and will take time to complete.
This list of how globalization affects accounting standards and the differences between GAAP and IFRS is certainly not all-inclusive, but it shows just how big an impact it has. Although it can be difficult to achieve convergence of the two sets of standards, it is certainly better to make a single set of standards to be used in a potentially global aspect. In conclusion, the transition process will take time to discover the pros and cons of how to report specific financial statements, but it will improve the way you do business internationally.
Forgeas. (North Dakota). AICPA | http://www.IFRS.com. Consulted on April 13, 2015.
Harper. (North Dakota). Consulted on April 13, 2015.
Kieso, D. & Weygan, J. (2013). Intermediate Accounting (15th ed.). Hoboken, NJ: Wiley.
Nguyen. (2010, January 13). What are some of the key differences between IFRS and US GAAP? Consulted on April 13, 2015.