In the accounting world, there are sets of rules that are followed to make sure business is ran smoothly and orderly. In the United States accounts follow a set of rules known as GAAP (Generally Accepted Accounting Principles). It is known as being a rule based system. However, a larger population of the world follows the accounting standard known as IFRS (International Financial Reporting Standards. Many countries follow this standard which is known for being more principle based. These countries use this method so they can understand each other’s methods and can identify what they are doing. While GAAP and IFRS are not too different from each other, they do have some major differences.
With IFRS being principle based, it leaves a lot of room for different interpretation that could lead to disclosures on financial statements that can influence a firm a lot. GAAP’s rule based principle keeps firms on track by having a clear cut list of rules that show them what they can and cannot report. This does not allow firms to do as they please and keeps everyone on the same page. Another difference between the two companies is the use of LIFO (Last in First out). This is an inventory method used that means the last inventory that is brought into the company will be the first sold. GAAP allows companies to choose between this or FIFO (First in First out). IFRS however does not allow companies to use LIFO and they must go with FIFO. In regards to developmental costs the standards differ again. GAAP always label these costs as expenses. Whereas IFRS has a criteria that if these costs match, they can then be capitalized instead of expensed. GAAP being a rule based standard, if does not give companies that many choices. Once an asset is recorded to its’ market value, there is no turning back on that amount even if it changes in the future. IFRS however says that if there is a change in the market value of the asset than they may reverse the write down and change it to its new market value.
Even though there are many differences between the two, why there is not a rule standard that is used worldwide. One reason is based off of the two standards both have. The United States believes that they should have a specific rule set and if it is broken then they know to go to the auditors and accountants to find the problem. IFRS allows for more freedom and prefers that they give companies more flexibility in how they approach their business. Another reason why the two will not merge is that IFRS likes to work on problems alone. They do not reach out to others and work with them to fix what is wrong. GAAP is opposite as they want others to come in and help if there is an issue they cannot solve. They have released standards and in those none of them coincide with what IFRS believes. This continues to show that they are different.
Finally, a major reason why the two will not join to become one is politics. Politics are big issue in a lot of areas and accounting does not avoid it. In the United States, giving up their rule set of GAAP to a foreign policy from outsiders that they did not form is not appealing to them. They believe that if they give it up then they are not protecting the investors in the country and leaving them liable for future problems. GAAP members also think that with a more principle based standard and not rule based there is a lot of room for companies to do what they want. It is uncomfortable for GAAP to have looser rules and let companies do as they please. They believe there is a lot of room for problems that can arise from this. Once asked about why they don’t converge, they responded that investors believe that “giving up their high quality standards should not be compromised for the sake of uniformity. However there have been minor adjustments made to GAAP to close the differences between the two a little and they want to lessen the gap as much as possible without losing what they believe is to be right.
In conclusion, there are many differences between GAAP and IFRS. Both are set up to help companies correctly file information and do business in an efficient way while following standards. The differences between the two standards has become less but there is still a larger gap between the two. It will be interesting to follow the track of these two accounting standards and see if one day there will only be one set of standards.