GAAP Lives!

For the past ten years, U.S. accountants have prepared for the convergence of the U.S.-based Generally Accepted Accounting Practices (GAAP) and the International Financial Reporting Standards (IFRS). As commerce globalizes, it seemed that a standard set of rules would make sense. However, after ten years of “convergence” efforts, it seems both GAAP and IFRS are here to stay for the foreseeable future. While Securities Exchange Commission (SEC) has backed convergence, the Financial Accounting Standards Board (FASB) is and the International Accounting Standards Board (IASB) announced in 2012 that full convergence is no longer a priority.

History of Convergence Efforts

The idea behind a global standard set of accounting standards can be dated back to 1973 with the establishment of the International Accounting Standards Committee (IASC). However, it wasn’t until the mid 1990’s did the international community start to take action. During the time, the European Commission got involved as the European Union got stronger, partially due to the collapse of communism across Central and Eastern Europe. In 1999, the IASB was established as arm of the IASC with the sole responsibility of setting international accounting standards, when IFRS were created. In September 2002, when EU-listed companies were required to prepare financial statements in accordance with IFRS, the U.S. became involved, executing the Norwalk agreement, which was an agreement to use “best efforts to make existing standards fully compatible as soon as practicable…” Since then, both practical and political matters have put convergence efforts on indefinite hold.

Primary Differences

Both FASB and IASB agree that GAAP and IFRS are more similar than not. However, there are some major areas where the two differ. One is the IFRS “principle-based” methodology compared to the U.S. “rules-based” methodology. For example, when valuing fixed assets, GAAP utilizes historical cost while the IFRS allows for reevaluation. While the IFRS carrying value of an asset may be closer to the true value of an asset, it is also more subjective. This also applies to depreciation and impairment. IFRS requires an annual review of assets’ useful lives, residual value, and depreciation methods. GAAP requires such a review only if there is a change in circumstances.

Reasons for the Stalemate

Tax experts in the United States have plenty of reasons to keep GAAP. Amid the Enron and other scandals, U.S. constituents were hesitant to establish a new set of “principle-based” accounting standards for would-be fraudsters to take advantage of. U.S. companies would surely have suffered higher tax burden. Whereas IFRS seeks to determine true value of fixed assets, it is an acceptable practice in the U.S. to utilize GAAP standards to minimize taxes. Therefore, U.S. CEOs and tax advisors likely had a hand in vetoing the acceptance of IFRS standards in this area.

Besides, it seems that two sets of standards are not that much of an inconvenience for companies that do business globally. Previously, it was thought that a common set of standards was essential for true globalization. Now, it seems that convergence efforts have created a generation of bilingual accountants who easily understand the differences in GAAP and IFRS. This has made the effort of convergence no longer cost-beneficial. While expected to continue, developing an internationally-accepted accounting standards is no longer an urgent priority.

Sources

http://europa.eu/about-eu/eu-history/index_en.htmhttp://www.cfo-insight.com/reporting-forecasting/accounting/convergence-of-ifrs-and-us-gaap-is-not-dead-just-dormant/

http://www.ey.com/Publication/vwLUAssets/US_GAAP_versus_IFRS:_The_basics_November_2012/$FILE/US_GAAP_v_IFRS_The_Basics_Nov2012.pdf

 

About Sara Huter

Sara Huter has over 15 years experience in the banking and energy industries, and over 10 years as an adjunct professor. Her work has been published for BusinessBee.com, the International Directory of Company Histories, the Encyclopedia of Business Insights: Global, EHow.com, and Examiner.com. Find out more about Sara at her Google+ Profile.