After the stock market crash of 1929, our federal government established the Securities and Exchange Commission (SEC). The SEC’s role was to help develop and standardize financial information that would be presented to shareholders. The SEC now requires all public companies to follow GAAP. Although they have the authority to enforce GAAP in the private sector, they have chosen to allow the American Institute of CPA’S (AICPA) to enforce financial standards. The AICPA established the Accounting Practices Committee and the Accounting Principles Board. The inability of the two organizations to narrow down the areas of difference and inconsistency in GAAP led to the creation of the Financial Accounting Standards Board (FASB).
More than 120 countries around the world have adopted IFRS, and the European Union requires all its companies to use it. The SEC believed that since most companies around the world use IFRS, it would require all US companies to use it by 2015. It is now 2015 and the US still follows GAAP. There is hope for the conversion of the two systems with the official obligation of the FASB and IASB to approximate GAAP and IFRS. Both boards have recognized some short-term and long-term projects that will kick-start the conversion. These projects involved each party’s system adopting the rules of the other party’s system.
GAAP includes a mixture of more than two thousand documents that have been urbanized over the past 70 years or so. All of these documents have made it very difficult to research certain topics in GAAP without getting old or incorrect answers. The FASB was able to solve this problem by creating the FASB GAAP codification. It organized all the authoritative US GAAP in one place. This makes GAAP research much more efficient and effective by providing a single place for all the literature on various accounting topics. It did not create any new GAAP, but removed nonessential information such as reductive document summaries, conclusion sections, and historical content.
Companies outside the United States often prepare financial statements using standards different from U.S. GAAP. US companies overseas may use GAAP, and foreign companies listed on a US stock exchange must use IFRS. Although GAAP and IFRS are quite similar, most parties have found that global markets will benefit from only one set of accounting standards being used. More than 120 countries around the world have adopted IFRS, and the European Union requires all its companies to use it. The SEC believed that since most companies around the world use IFRS, it would require all US companies to use it by 2015. It is now 2015 and the US still follows GAAP. There is hope for the conversion of the two systems with the official obligation of the FASB and IASB to approximate GAAP and IFRS. Both boards have recognized some short-term and long-term projects that will kick-start the conversion. These projects involved a two-party system that adopted the rules of the other party’s system, making GAAP and IFRS more consistent.
In general, US GAAP is identified as more rules-based, while IFRS is considered more principles-based. Recently, in an attempt to bring the two systems closer together, the FASB issued a short-term draft rule that permits the fair value option for financial instruments. On the other hand, the IASB completed a short-term project related to borrowing costs that made IFRS more consistent with GAAP. There are many long-term projects dealing with revenue accounting, conceptual framework and leases. These projects are only a step in the right direction towards the long-term goal of converting GAAP and IFRS into one set of accounting standards that will be used worldwide.
Converging to one set of accounting standards is easier said than done. This is most likely the reason why the originally set SEC date was pushed back. Many different accounting topics and many disagreements can arise between the FASB and the IASB. For example, one of the main differences between US GAAP and IFRS is that US GAAP operates in a real-time method environment and IFRS favors accrual methods. US GAAP uses real methods primarily because firms are less able to adjust earnings as they spiral downward. This represents a more effective way of detecting errors in financial records and also creates enforcement of effective reporting. Real-world methods provide outside investors with more credible ideas about company values. For these reasons, companies experiencing a decline in profits may prefer the IFRS accrual method. With that being said, there could be a lot of unhappy companies if IFRS side with US GAAP on this topic. There are a number of issues that the IASB and FASB will have to decide on, but both sides will have to compromise if they are to truly converge on one set of accounting standards for the global market. Who knows when full convergence will occur?
GAAP represents the accounting system used in the United States of America. IFRS represent international accounting standards.
More than 120 countries around the world have adopted IFRS, and the European Union requires all its companies to use it. The SEC believed that since most companies around the world use IFRS, it would require all US companies to use it by 2015. It is now 2015 and the US still follows GAAP. There is hope for the conversion of the two systems with the official obligation of the FASB and IASB to approximate GAAP and IFRS. Both boards have recognized some short-term and long-term projects that will kick-start the conversion. These projects involved each party’s system adopting the rules of the other party’s system.
Tutorial Video
The AICPA established the Accounting Practices Committee and the Accounting Principles Board. The inability of the two organizations to narrow down the areas of difference and inconsistency in GAAP led to the creation of the Financial Accounting Standards Board (FASB).
It is now 2015 and the US still follows GAAP. There is hope for the conversion of the two systems with the official obligation of the FASB and IASB to approximate GAAP and IFRS. Both boards have recognized some short-term and long-term projects that will kick-start the conversion. These projects involved a two-party system that adopted the rules of the other party’s system, making GAAP and IFRS more consistent.