International Financial Accounting Standards Versus Generally Accepted Accounting Principals

Though we have known for hundreds of years of the bulbs rounded measurements, the last few years have proven that the world might be "flat" after all. People communicate all over the globe like never before, enabling transactions to circulation easily from nation to nation. Because this is a first time incident as never seen in history, everyone is adjusting quickly to new types of issues or ways that we could create these communications more effective. One problem is that because of the free flow of business transactions through different nations and different law enforcements, one set of accounting standards needs to be put in position to have simpler access to financial information. International Financial Reporting Standards are one set of accounting standards, put in position by the international Accounting Standards Board, which is becoming the international conventional for the planning of community organization financial statements. The present lack of a consistent set of accounting standards makes issues for organizations preparers and customers. Many worldwide organizations, lenders, and traders support the idea for an international set of accounting standards, which would help you to evaluate the financial statements of a foreign competitor, to better understand possibilities, and to cut price by using one accounting process company-wide.

Currently over 12, 000 organizations in 113 nations have implemented international financial reporting standards as their new accounting standards. The SEC considers that this number will keep increase. Asia, South America, North America and Native Indian nations plan to start using IFRS truly & 2011. South America will embrace IFRS this season. This same season the U.S. will consist of IFRS questions on their CPA examinations. Chief executive Osama launched the economical regulating change suggestions, on July 17, 2009, which called for accounting standards setters to "make significant success toward growth of only one set of high-quality international accounting standards" by the last year. The U. S. Declares are required to meet and/or embrace the international standards, IFRS and stop to use their present usually approved accounting fundamentals, as early as 2012. The suggested due date, which needs U.S. community organizations to use IFRS, has been delayed to 2015. To be able to do this, modifications between GAAP and IFRS need to be identified and removed.

There are several main modifications between GAAP and IFRS, which are resulting in significant setbacks in their unity. Some significant differences between these two standards are that the IFRS does not allow LIFO, it uses only one phase method for incapacity write-downs, it has different guidelines for treating financial debt covenants, reports business sections in a different way, has different merging specifications, and is less comprehensive assistance regarding income identification than GAAP. These modifications at a lowest have to be extremely analyzed by FASB to figure out comprehensive effects on U. S. Declares organizations.

The first major difference between these two set of standards is the handling of inventory. Currently, U.S. GAAP allows the costing methods for inventory of FIFO, average cost, and LIFO. The IFRS has banned LIFO and companies will have major changes in inventory valuation to fit the new standards. Also, no special rules for livestock or crop are specified in GAAP, while IAS 41 specifies the use of fair value less estimated selling costs for biological assets. Another important change in inventory accounting is that IFRS will present inventory at lower of cost or net realizable value rather than market. The IFRS will also require that lower of cost or market adjustments be reversed under defined conditions, while U.S. GAAP does not allow this reversal.

Second, IFRS has different measurement procedures for the impairment of goodwill and other intangible long-lived assets. U.S. GAAP measures goodwill impairment using a two step process that first compares the estimated fair value of the reporting unit with the unit's book value. If the book value is greater than the fair value, goodwill is impaired and step two needs to be completed. In this next step, the fair value of net identifiable assets are established and subtracted by the reporting unit's fair value. The excess in the fair value of net identifiable assets is to be considered the goodwill impairment. IFRS will not use this process of measurement and instead will use a single-step computation similar to other long-live assets. This measurement for long-lived assets will be done with reference to higher of value in use or fair value less costs to sell. When this impairment for the long-lived assets (not goodwill) is measured they are allowed to be reversed in certain conditions under the IFRS.

Third, GAAP and IFRS have different rules when dealing with the curing of debt covenant violations. When a debt covenant violation has occurred it must be cured before the end of the year balance sheet date because under international standards it is not permissible after year end. This will have a large impact on the way companies will chose to finance their operations. There will be more pressure for companies to renegotiate their debt or they will have to raise capital through the issuance of their equity. Violations of debt covenants will show clearly which companies are not financially strong and will continue to show future problems.

The last major difference between GAAP and IFRS is that the revenue recognition guidance is less extensive for the IFRS. The IFRS guidance on this topic fits into one book about two inches thick, while the U.S. GAAP has approximately 17,000 pages of rules and guidance. (IASB) One reason for this is that GAAP contains industry-specific instruction, for instance, the revenue made by software development. The IFRS has relatively low regulations on the way specific industries recognize revenue. Some other differences between GAAP and IFRS are differences in segment reporting and consolidations.

Segment reporting differs slightly between the two standards because GAAP is flexible about how the company defines its segments through the management approach. The internal management selects specific segments even if they differ from the financial statements, when following GAAP, because these segments correspond to the internal operations. The IFRS will not allow the management approach, and the segments used must match the financial statements. IFRS No. 8 "Operating Segments" requires the reportable segments to be disclosed in both the annual and interim financial statements, which include both business and geographical segments. Another difference is that it will be required to have two different bases of segmentation, a primary base and a secondary base.

Another distinction between these two standards is that consolidation will be handled differently. First, GAAP requires consolidation for majority owned subsidiaries, while IFRS will look at control as a factor for consolidation. Some other differences are that variable interest entities and qualifying SPEs have not been addressed by the IFRS, parent and subsidiary accounting policies will need to be conformed, and minority interests will be required in equity. When it comes to consolidating foreign subsidiaries there are additional differences to consider. In order to consolidate a foreign subsidy, the parent company needs to receive the foreign financial statements and conform to U.S.

GAAP before translation of the foreign currency. This step will be eliminated and will make this type of consolidation easier. More emphasis, however, will be placed on the currency of the economy of which business actually occurs to determine the functional currency, while GAAP is open to judgment with high consideration of cash flows. And last, under GAAP the equity accounts are translated at historical value, but are not specified under IFRS.

There are many differences between the U.S. generally accepted accounting principles and the international financial reporting standards, including but not limited to topics such as, inventory, impairment measurements, the handling of debt, revenue recognition, segment reporting, and the consolidation of financial statements. With the determination for one set of reporting standards elimination of these dissimilarities will be evident through the ongoing efforts between the FASB and the IASB. The most important thing is that accountants in the United States need to be ready for this inevitable event, because after all, the world is flat.