IFRS versus GAAP
Isaac Hayes - 20 March 2009
The world has witnessed a financial crisis unprecedented in history, and what many have failed to realize is the effect of this on balance sheets, and company valuations.
The worldwide governments will try to inject liquidity in the system to avert a total collapse of corporate balance sheets.
Can the effects of the liquidity save the housing market in order to save the banking sector or will the liquidity give rise to new leadership in another asset class is the question.
I would suspect there are many fights as a tectonic shift in accounting rules could soon be under the way soon as accounting rules from U.S. GAAP to the international standard, IFRS, may be under way.
The SEC has pondered making it an option (or even mandatory), meaning accountants across America might need to be re-educated.
A single global standard is meant to simplify the world of accounting, but some fear that applying a foreign standard could be a solution more complicated than the problem, but who are those that fear a single global standard?, which may in fact give us a "mark to market" again, across the entire globe.
The Securities and Exchange Commission (SEC) announced it plans to switch U.S. companies from generally accepted accounting principles (GAAPs) to international financial reporting standards (IFRSs) based on a recent release of a roadmap.
The proposed switch has caused much controversy, but the switch probably will still occur regardless of what the majority may believe.
On August 27, 2008, the SEC proposed that a roadmap will be published as a guideline for the switch to IFRS from U.S. GAAP.
In the roadmap, it states that it will give a 90 day comment period, which will end 90 days after the roadmap document is published in the Federal Register. Secondly, in 2011, the SEC will decide whether to proceed with the rulemaking to require U.S. issuers to begin using IFRS by 2014.
Throughout the world, several countries are either in the process of switching over to IFRS or are already using IFRS. The European Union has already switched to IFRSs and the same year the U.S. companies have their deadline to switch over, “… China, India, Japan, and Canada also are scheduled to make the switch.” The European Union started their transition in 2002 and it ended in 2005.
Switching to IFRS will help companies, investors, and the public globally compare their financial statements easier, and stop "cheat accounting."
“By adopting IFRS, a business can present its financial statements on the same basis as its foreign competitors, making comparisons easier” and stopping the "cheat bean counters", and thus bring into play a truly global accounting system which makes the world one step closer to teamwork and unity, which of course some "players" wont like.
The opposition like to point out that The first reason why there is disagreement for the switch to IFRS is that the standards introduce uncertainty in the evaluation of financial standards. It raises uncertainty because international financial reporting standards permit managers to exercise their own judgment when deciding what to report in their financial statements (Albrecht).
But how exactly are the financial statements uncertain? IFRS provides consistency throughout the world on how to read and understand financial statements. If every country uses different financial standards to compare statements it would cause even more uncertainty because not everyone is going to know how to read and understand another financial statement with different standards, which leads to disbelief in those statements.
Some people dislike the switch because unlike GAAP, there isn’t much enforcement with IFRS. Unlike GAAP, which has several organizations such as the Securities and Exchange Commission that watches over its accounting rules, IFRS does not. There isn’t a global organization such as the SEC that watches over the international standards (Albrecht)..............
Although the IFRS may not have several organizations watching over it like GAAP, it brings unity all over the globe in preparing financial statements. With all the countries that are reporting with IFRS, each country can watch over each other when it comes to following the accounting standards. And from there is also the International Accounting Standards Board (IASB). IASB may not be like the SEC, but it is an organization that does oversee IFRS. Over time, with more and more countries entering into the IFRS world, more organizations will probably emerge to help regulate the international accounting standards.
