Sunday, November 30, 2008

GAAP's effect in the United States

Generally Accepted Accounting Principles (GAAP) are crucial when it comes to financial reports in the United States. As explained earlier, there are many rules and regulations that must be followed to prepare and present financial reports. These rules are very important because it gives potential investors and creditors the opportunity to understand how the company is performing as well as how they have progressed since their start.

Knowing how a company is performing is very important when thinking about investing in a company. Think about it if you wanted to invest in a company. You would want to know what is going on with that company, how they are doing, are they going to continue business, and will business progress over time. Those are only a few of the many questions that run through our minds and the minds of investors before they invest in a company. However, with the right set of financial reports, based on the rules of GAAP, information can be gathered to come to conclusions about that company and choose whether or not to invest in that company.

GAAP has made it easy for people to know about their company and how they are performing. With the switch to International Financial Reporting Standards (IFRS), it isn't going to be clear as to how the company is performing. Because financial statements prepared under GAAP are intended to reflect an economic reality, GAAP makes a company's financials comparable and understandable so that investors, creditors and others can make rational investment, credit and other financial decisions. In order to be useful and helpful to users, GAAP requires information on financial statements to be relevant, reliable, comparable and consistent. Likewise, with IFRS and the principle-based accounting system, the financial reports are going to be a lot harder to compare to one another in turn making it hard to decide whether or not to invest in that company.


United States Generally Accepted Accounting Principles

In the United States, companies currently use Generally Accepted Accounting Principles (GAAP). These accounting principles are rule-based and follow very strict guidelines when preparing financial statements. The rules that are contained in GAAP are created by the Financial Accounting Standards Board (FASB). The FASB is the main authority when it comes to GAAP.

GAAP is mainly responsible for providing financial reports to anyone interested. The financial reports that are included in GAAP are the balance sheet, income statement, statement of retained earnings, and statement of cash flows. In doing so, these reports should provide useful information to present to various parties such as potential investors and creditors. This is important because the financial reports can either help your company to attract new business or do the exact opposite and take business elsewhere.
There are many rules that must be followed in order to present precise, relevant, and accurate financial reports. These rules are based on different assumptions, principles, and constraints. The assumptions that must be followed are the business entity, going concern, monetary unit, and time-period assumption. The principles are as follows: cost principle, revenue recognition principle, matching principle, and the full disclosure principle. The constraints are objectivity, materiality, consistency, and prudent constraints. All of these aid in preparing and presenting financial reports of a business using GAAP.

Professionial opinions on switch to IFRS?

In October of 2008 the Journal of Accountancy released an article titled "Profession Reacts to IFRS plan." In this article many leaders and professors of both international and US standards stated their views on the plan for converging US GAAP with IFRS. It mainly consisted of two views, the need for GAAP to merge with IFRS and doubts of certain aspects of IFRS.

Two main opinions I'd like to focus on are that of, Jack T. Ciesielski, who is a former member of FASAC (Financial Accounting Standards Advisory Council) and David R. Campbell Sr., who is the head at Drexel University Department of Accounting. Ciesielski supports the move to IFRS but as he explains is "cautious." While Campbell thinks the switch will be difficult but in the end the US will respond positively towards the switch.

The main point that Ciesielski brings up is the lose of LIFO. Last in first out (LIFO) is used as an inventory cost method which takes the most recent purchases and expenses them as cost of golds sold. Most companies use it for tax purpose as it lowers corporate tax. If LIFO is not allowed, companies will be forced to use first in first out (FIFO). This will prove a challenge as mentioned above most companies in the US use LIFO. Using FIFO will increase profitability but in turn it will bring more corporate taxes. The question is, how will US companies deal with only being able to us FIFO.

On the other hand Campbell has faith that the educators in the US will response to the change in environment very well and produce good students that will soon provide leadership in the future. We in the US have developed the American Institute of Certified Public Accountants (AICPA), whose main duty is to keep introducing IFRS standards to people who aren't aware. This will help the shift to IFRS immensely. Also US GAAP and IFRS aren't completely different from one another. While they differ on some standards most of them share similar standards.

Full article can be found here:


Thursday, November 27, 2008

Advantages/Disadvantages of IFRS.

There are many reasons why companies are choosing to migrate towards adopting IFRS before they become mandatory. One of the most important reasons is due to globalization, as most countries have already made the switch over to IFRS. If companies in the US switched over to IFRS it would make transactions and deals with companies who operate under IFRS much easier. It would also give companies and stockholders in other countries a better economic indicator as to how companies here in the US are doing.

Another advantage with IFRS is clarity and productivity. Under IFRS, financial makers use their own professional judgment as to how to handle a specific transaction. This will lead to less time being spent trying to follow all the rules/complications that are coupled with rules-based accounting. It will also allow prepares of financial information to keep statement in a simplistic and understandable forms for investors and other companies interested in said companies financial statements.

A big disadvantage about companies in the US adopting IFRS is that current and future accountants will have to relearn how to do their jobs. This doesn't seem like much of a problem but its definitely something to consider. If companies are willing to pay for their accountants to go back to school they will be incurring more cost. US companies are also bound to see declines in profits during the first years when they switch to IFRS as their accountants will still be learning how to prepare financial statements under IFRS.

The switch over to IFRS may be a difficult one but in the end it will provide more understandable financial statements and will lead to true economic status. It would also make dealing with international companies much smoother, globalization in other words.


Sunday, November 23, 2008

Just a bit of back ground information:

The main difference between GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards) is that GAAP is rule-based accounting, while IFRS is principle-based accounting.

Rule-based accounting is where employs seek to identify the rule that tells you how to specifically handle different types of transactions and how they must be accounted for. This can lead to more work/time due to accountants having to follow specific steps with no question. On the other hand, principle-based accounting lets the prepares of finical statements exercise professional judgment and have them deciede how transactions should be handle. While there are set examples of how to handle transactions in principle-based, it puts more emphasis on the professional judgment and loyalty of the individual.


Friday, November 7, 2008


So what do you all think about the switch from US Accounting Standards to International Accounting Standards? Personally, I don't like this at all. This would force many people to learn the new accounting standards all over. The process of re-learning will be very long and tidious. Let me know what you think!