Trend Paper working draft

Claire Malinowski

COM102 001

Mr. Shermak

15 July 2010

The Switch from GAAP to IFRS

A wise English philosopher, Francis Bacon, once stated, “Things alter for the worse spontaneously, if they be not altered for the better designedly” (Bacon).  This is exactly what the United States is thinking of doing, altering our financial standards in order to better our economic standing.             Since the beginning of our country’s birth, there have always been financial standards that companies and businesses have had to follow. As we can tell from the events of the Great Depression, they have not always been followed. Since then, the U.S. has created and enforced rules to try and carry on our country in good standing. The only thing that might harm our country with our current standards is that the majority of the world uses a different financial standard.

The United States currently uses our own Generally Accepted Accounting Principles (GAAP). After the Great Depression, the federal government created an organization identified as Securities and Exchange Commission (SEC). SEC was created to enforce and regulate GAAP. This led to the foundation of the Financial Accounting Standards Board (FASB), whose duty is to regulate accounting found in financial statements, also known as GAAP. “Generally Accepted Accounting Principles are uniform minimum standards of and guidelines to financial accounting and reporting. GAAP establishes appropriate measurement and classification criteria for financial reporting.” (State Administrative and Accounting Manual Chapter 80 Accounting Policies).

Over 131 countries currently follow International Financial Reporting Standards (IFRS). “The IFRS Foundation is an independent, not-for profit private sector organization working in the public interest. Its principal objectives are: to develop a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRSs) through its standard-setting body, the International Accounting Standards Board (IASB); to promote the use and rigorous application of those standards; to take account of the financial reporting needs of emerging economies and small and medium-sized entities (SMEs); and to bring about convergence of national accounting standards and IFRSs to high quality solutions.” (IFRS).

The essential objective of IFRS is to decrease costs for multi-national corporations, and to let investors make valid judgments between companies across the world.

The trend towards IFRS has developed around a universal arrangement to coordinate accounting standards world-wide. It is viewed as more than just a way to bestow an international accounting standard; it is also a chance to inspect the reliability and value of management during exposure of financial statements. The IFRS foundation has greater potential in making available a general policy for investors and companies to evaluate financial statements (GAAP VS IFRS).

Even though there are numerous differences between GAAP and IFRS, there are also similarities. The general principles, conceptual structure and financial results are all similar, if not the same.  The two sets of principles are overall more comparable then they are different.

One of the main differences between the two sets of standards is that IFRS is more likely to be principle-based. GAAP on the other-hand is rule-based standards. Rule-based standards are more easily applied and implemented when put side by side with principle-based standards. Principle-based standards structure makes it more likely to have different ways to interpret similar transactions. This entails uncertainty and involves widespread disclosures in the financial statements. Although principle-based might be harder to interpret, the areas of debate can be simplified by the standards-setting board. Due to these clarifications, principle-based standards present less exception than rule-based. IFRS is comprised of positions and direction that can be measured as sets of rules instead of sets of principles. (Is IFRS That Different From U.S. GAAP? )