United States Accounting Standards vs International Accounting Standards June 21, 2009 Introduction This research project will inform the reader of the difference between the United States accounting standards and International accounting standards. The United States uses the Financial Accounting Standards Board (FASB) to issue financial reporting procedures. The International Financial Reporting Standards (IFRS) are issued by the International Accounting Standards Board (IASB).
There are proposals for the United States to adopt the International standards. Financial reporting procedures are debated about the United States using the Generally Accepted Accounting Procedures (GAAP) or following the global procedures. This project will also examine, compare, and contrast this debate. Discussion of Topic In an article by Heidi Tribunella (2009), “U. S. GAAP is considered rules based. Rules-based accounting standards, on the other hand, give strict rules that must be adhered to in order to properly account for particular transactions.
For example, lease accounting in the United States gives four criteria for determining if a lease is a capital lease. If a lease contains any of the following, then it is considered a capital lease and must be accounted for as such: 1 ) a bargain purchase option; 2) ownership transfers at the end of the lease; 3) minimum lease payments with a present value of at least 90% of the FMV of the asset; or 4) a lease length of atleast 75% of the economic life of the asset. This is an example of very specific rules for accounting for leases” (Tribunella, 2009).
Tribunella (2009) goes on to explain International accounting standards, “International Financial Reporting Standards (IFRS) are issued by the International Accounting Standards Board (IASB), which was created in 200l. Previously, the International Accounting Standards Committee (IASC), founded in 1973, issued International Accounting Standards (IAS). When the IASB was created, it adopted the IAS and continued the work of the IASC” (Tribunella, 2009). Gary K. Meek and Wayne B. Thomas (2004) explain the influence of the IASB on the global reporting standards including the U.
S. GAAP. “In 2000, the International Organization of Securities Commissioners (IOSCO), of which the SEC is a member, recommended to member countries that IASC standards be used in cross-border offerings and listings. The enforcement of International Financial Reporting Standards (IFRS) by exchange regulators will be crucial to the eventual acceptance of the IFRS around the world…In October2002, the IASB and the Financial Standards Accounting Board (FASB) issued a memorandum of understanding, which formally stated their commitment to the convergence of IFRS and U.
S. GAAP” (Meek and Wayne, 2004). Jose Marrero and Thomas Brinker (2007) explain the efforts of the IASB and the FASB to merge their practices. “Over the last two decades, research indicates that developing a framework of global accounting standards favors the recognition of culture. Cultural differences will impact a nation’s final consensus regarding accounting standards. However, after years of discussion, a solution to the dilemma of merging culture or international cultures and accounting standards has yet to be found.
Currently, the International Accounting Standards Board (IASB) and the FASB are working on a principle-based framework for global financial reporting standards the cooperation of both the IASB and FASB will yield a uniform body of accounting standards allowing financial and investment advisers to view global investment opportunities on a more level playing field…” (Marrero and Brinker, 2007).
They also point out why certain business owners may not want to follow global practices, “Further, business owners are unwilling to abandon their localized business practices to appease the accounting standards imposed on the multinational companies, much less their bookkeeping and financial reporting standards to the jurisdiction of a U. S. -dominated accounting standard board” (Marrero & Brinker, 2009).
David Bogoslaw (2008) talks about the convergence in further detail, “The uproar over fair value accounting practices, which some critics have blamed for the depths of the global financial crisis, threatens to sink a long-sought move by countries around the world toward a single set of international financial reporting standards (IFRS). The U. S. Financial Accounting Standards Board (FASB) has been working with London’s International Accounting Standards Board (IASB) since 2002 toward what accounting professionals call convergence.
The Securities & Exchange Commission (SEC) is expected to announce its road map for conversion sometime this month, which will probably include early adoption in 2010 for about 110 of the largest U. S. companies with business operations throughout the world. The key difference between U. S. Generally Accepted Accounting Principles (GAAP) and IFRS is that U. S. standards are based on explicit rules while the international standards’ reliance on principles gives companies more room to use their judgment in deciding how to recognize revenue and other key metrics.
Adoption of IFRS would also probably trigger a big tax hike for U. S. companies, which would no longer be able to use the last-in-first-out [LIFO] inventory accounting method, which doesn’t exist under the international standards. The LIFO method assumes that goods purchased most recently are sold first and that the remaining items have been purchased at earlier periods, yielding a lower gross profit during high-inflation periods than the first-in-first-out accounting method” (Bogoslaw, 2008).
The main debate over switching accounting practices is further explained by Bogoslaw (2008) by stating, “‘The debate over switching to accounting standards based on something less explicit than rules comes down to questions about whether the less explicit standard will provide adequate protection against lawsuits’, says James Leisenring, director of technical activities in research at the FASB. ‘You can’t understand the debate about gratuitous vs. obligatory guidance (within IFRS) until you understand the litigation system in the U. S. ,’ where companies are more concerned about getting sued than in other parts of the world, he says. What it’s really about is safe harbors. What (IFRS skeptics) really want to know is if I do it in a particular way, am I home free or not? ’ The explicit rules under GAAP may appear to offer safety, but the downside is there are so many of them that the odds of missing one or two are greater, he says. From Leisenring’s perspective, the big accounting firms that are drawn to IFRS believe they’ll get sued less since it will be harder to point to their mistakes. White agrees that some companies like the freedom allowed under IFRS to interpret standards to suit their convenience, which undercuts uditors’ ability to prohibit certain accounting choices” (Bogoslaw, 2008). Bogoslaw (2008) explains two sides of the criticism this switch has been receiving. Many are for it, but some are against it. “The most strident critics of migration to IFRS argue that the primary goal of the SEC and U. S. Treasury Dept. is attracting capital to U. S. markets, rather than ensuring that the highest quality accounting standards prevail. While attracting more capital to the U. S. ‘is a valid business objective, it’s not clear we can do that by going to international financial reporting standards,’ says Ashwinpaul Sondhi, president of A.
C. Sondhi Associates in Maplewood, N. J. , who has served on CFA Institute committees. Paul Miller, a professor of accounting at the University of Colorado, would prefer to have competing standards, since the only standards all countries would be able to agree on would be very weak ones. He also believes a unified set of standards, rather than being helpful, would stifle much-needed innovation given that most of the existing accounting standards are more than 60 years old” (Bogoslaw, 2008). Adam Pieniazek (2007) wrote in a research paper about the comparison and contrast of U. S. GAAP and International Accounting standards, Due to the uncertainty of what the future American accounting standard will be, individuals and organizations in the US, would rather have the FASB pick one of the options and declare that it will stick with it, rather than debate for eons over the positive and negative aspects of the principles and rules based approach. As many prominent countries are already using the International Financial Reporting Standards, the representatives of American accounting must act now to align us with the IFRS; otherwise we face potentially being shut out from the formation process of these standards which will affect all international companies.
The FASB’s cooperative work with the IASC will result in a true Global GAAP; once the IFRS is aligned with the U. S. GAAP system, the American companies will issue statements according to the IFRS, as the SEC has declared that ‘it will remove the reconciliation requirement once it is satisfied that IFRS are of a sufficient standard. ’ The completion of convergence will be a boost to the global economy, and inherently, all underlying economies, as it will standardize the practice of accounting, allowing more work to go into principles and theory research, and increase the pool of available and applicable accountants.
No longer will investors have to reconcile financial statements to an accounting style they are familiar with and neither will accountants have to prepare statements differently in various countries” (Pieniazek, 2007). Conclusion United States Accounting Standards and International Accounting Standards are two different practices in financial reporting, that come from different bases. These two practices are being worked on to converge and use a Global accounting standard. This convergence is creating much criticism. There are many countries that are currently using the International standards, and many more are starting to join.
The FASB and IASC are working together to converge by 2010. This convergence will also make it easier for accounts to prepare financial statements reporting United States and International transactions. References Bogoslaw, D. (2008, November 14). Global accounting standards? Not so fast. Businessweek Online, 17. Retrieved June 19, 2009, from http://search. ebscohost. com Marrero, J. , & Brinker, T. M. (2007, January). Are accounting standards uniform? Recognizing cultural differences underlying global accounting standards. Journal of Financial Service Professionals, 16-18.
Retrieved June 19, 2009 from http://search. ebscohost. com Meek, G. K. , & Thomas, W. B. (2004). A review of markets-based international accounting research. Journal of International Accounting Research, 3(1), 21-41. Retrieved June 19, 2009, from http://search. ebscohost. com Pieniazek, A. (2007, April 9). U. S. gaap vs. international gaap vs. unified gaap. Accounting,College. Retrieved June 19, 2009, from http://www. adampieniazek. com/college/us-gaap-vsinternational-gaap-vs-unified-gaap/ Tribunella, H. (2009, March). Twenty questions on international