GAAP Versus IFRS Research Paper

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IFRS vs. GAAP

GAAP vs. IFRS

Generally Accepted Accounting Practices (GAAP) refers to the set of guidelines and the resulting framework used to standardize accounting practices in the United States. The purpose of the GAAP is to assure that third parties who wish to view the financial information of a certain business entity can understand them in a manner that is free from bias or inconsistencies (Colson, 2005). These principles have developed out of tradition that became codified over the years. These practices have governed accounting practices in the United States and are considered to be standard in the U.S.

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The GAAP is the standard in the United States. However, other countries have their own set of standards, which might have degrees of similarity or be quite different from the GAAP (Wells, 2010). Globalization has meant the need to create a set of International standards that will allow the same degree of consistency and lack of bias that the GAAP has provided for the United States. In 1989, the International Financial Reporting Standards (IFRS) were developed to help fulfill this role (West, 2008). Rather than have two different sets of reporting standards, the U.S. is now considering adopting the IFRS to replace the GAAP. This would allow accountants to only to have to comply with one set of reporting rules, rather than having redundancy in having to comply with both sets of rules. This proposal has created considerable controversy in the financial community. The following will summarize the most recent research and professional opinion regarding the change from GAAP to IFRS standards.

Viewpoints

Research Paper on GAAP Versus IFRS Assignment

The controversy surrounding the switch from GAAP to IFRS generated a number of viewpoints from professionals in all positions within the business community. The biggest controversies surround the affect that this switch will have on operational management. International standards are currently the norm for most nations other than the United States. A change from the GAAP to IFRS will not only mean changes in reporting, it will mean changes in the business from the supply chain to the distribution chain. The affects of what these changes will be are still up for debate. These issues are at the heart of the debate regarding the adoption of IFRS/GAAP convergence as the accounting standard in the United States.

McLaughlin (2009) summarizes the major changes that accountants and companies will have to adjust to as the standards are adopted. One of the key changes and one of the first changes that will be seen, is the statement presentation format. The new format will include a statement of financial position. It will summarize comprehensive income and cash flows. These items will be divided into business, discontinued operations, financing, income taxes and equity. According to McLaughlin, the business section of each statement will be further divided into operating and investing sections. These will be divided into assets, liabilities, income and cash flow. This format provides a much more detailed report than the GAAP practices required.

Aside from functional changes, such as these, the philosophical basis for the statements will differ as well. Managers will have greater discretion under the IFRS in terms of where they wish to place certain elements of their operation (McLaughlin, 2009). Although the statements are more detailed, there are not as many rules under the IFRS as there are with the GAAP. McLaughlin also found that there are not as many industry-specific guidelines as with the GAAP.

Opinions regarding the affect that the IFRS will have on businesses depends on which business one happens to be addressing. An examination of opinions regarding whether this change is good or bad seems to depend on which industry the person is involved in, whether they are a major corporation or an SME and other factors. An examination of available sources reveals that opinions on the financial impact of the IFRA/GAAP convergence depend on specific affects that it will have on that business. Opinions differ widely in that respect.

A prime example of these affects is the disallowance of LIFO accounting for inventory. This eliminates huge deferred tax liabilities that were created by the use of LIFO. For instance, United Technologies estimated that the inability to use LIFO accounting would result in a $4 billion tax liability in the first year (McLaughlin, 2009). That could have a significant impact on business operations for the company.

Another key issue is that IFRS will allow revaluation of fixes assets, rather than using the historical approach under the GAAP. One could easily see how this might be good in some cases and bad in others. McLaughlin highlights many other changes that will affect the operations of the company. Valuation of properties, such as rented buildings and equipment will change as well. In many of these cases, using a different accounting method will produce different results. According to McLaughlin's study, companies reporting using IFRS reported earnings that were 6-8% higher than they would have if they had been reporting under the GAAP. This will mean greater tax liability for many companies.

Epstein (2009) explored the key issues surrounding the adoption of IFRS and concluded that the overall economic affects would be positive. He found that reporting quality could be expected to improve and that this would increase public trust in corporate institutions. He found that although the GAAP has a larger set of complex formal rules, the IFRS will provide investors with more reliable and consistent reporting results. The IFRS does not include industry-specific standards that are found in the GAAP, which means that everyone will be able to interpret the results of the financial statement without the need to have knowledge of the industry. Epstein found that adoption of the IFRS would result in lower costs of capital for many organizations. When one combines this affect with the differences in revenue found by McLaughlin, this translates into a much higher tax liability for many organizations.

Jermakowicz and Epstein (2008) found that one of the biggest changes would be the reliance on preparer and auditor judgments. However, they also point out that the IFRS will result in greater transparency and less ability to hide financial dealings. This will be an important issue in maintaining the trust of the public, which has been a key concern for American investors in recent years. This research suggests that adoption of the IFRS will result in increased trust by investors.

Epstein and Jermakowicz (2008) explored the impact of the IFRS on transactional attorneys. This examination found that the adoption of the IFRS would result in broad generalizations that had the potential for extensive and long litigation. Business transactions will be affected by these changes and misunderstandings are certain to grow as a result of the adoption of IFRS. This research by Epstein and Jermakowicz not only raises awareness of how the changes will affect business transaction attorneys, they raise and even broader question of what the affects of these changes will be for other industries, whether they related to accounting or other critical business operations.

Beuren, Hein, & Klann (2008) explored the differences between the IFRS and GAAP. They found that that adoption of the IFRS would not affect economic indicators in the U.S., as had been suggested by other authors. This research used correlational and regression analysis to explore these differences. The authors of the study did find that certain variables might affect the results. This study represented positive support for the adoption of IFRS.GAAP combined standards.

In a similar research study, Liu (2009) compared U.S.-listed foreign companies that are using IASB-IFRS and those using EU-IFRS. It was found that net assets reported using IFRS and GAAP are weak in terms of comparability. Although the IASB and IFRS are attempting to achieve cooperation, the results of this study indicate that they are far from their intended goals in actual practice, at least for the companies that were included in the study. One of the key limitations of this study was that only a small number of sample pairs were available. This study indicates that there is still much work to be done in the way of making the transition easier for companies. It also suggests that some financial fallout can be expected during the transition period.

Conclusion

The move to IFRS is being fueled by global pressure to adopt the standard. At present, about 100 countries are on the IFRS and only two are still using the U.S. GAAP (Epstein & Jermakowicz, 2008). For U.S. accountants and other professionals in the financial sector, this change means a drastic change from the way in which they conduct business. Accountants will have to not only change the forms that they use and their reporting format, they will also have to change their accounting philosophy. These changes are difficult and have been met by many grumblings among the accounting community. Accountants are the ones at the forefront of these changes and will have to make the greatest adjustments to these new practices and procedures.

As the literature suggested, the changes resulting from… [END OF PREVIEW] . . . READ MORE

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