What is globalization? Globalization is the act of expanding to other or even all areas of the world from the country of origin. Similar to its very broad definition, globalization can be the basis of discussion for a variety of topics. To limit myself a bit, I will focus primarily on Generally Accepted Accounting Principles (GAAP) versus International Financial Reporting Standards (IFRS). I will draw attention to some of the differences between IFRS and GAAP, as well as address some of the similarities between the two accounting standards. In addition, I will discuss some of the pros and cons of the United States’ transition from GAAP to IFRS.
There are two main systems of accounting around the world, General Accounting Principles, also known as GAAP, and International Financial Reporting Standards, also known as IFRS. According to The Business Dictionary, “GAAP provides objective standards for evaluating and comparing financial data and presentations, and restricts directors’ freedom to use creative accounting to paint an unrealistic picture” (4). With this system come both advantages and negative aspects. An advantage of GAAP is that the system is rules-based, which means there is less room for exceptions (2). With this aspect, it becomes easier to make correct statements while avoiding mistakes and mistakes. An added benefit is that GAAP separates its various entities into distinct parts. As for the downsides, the most important, and arguably the most important, is that of the non-existent universal way the accounting standard is performed. This makes it more difficult to compare statements and records with those of other countries.
The generally accepted accounting principles and the International Financial Reporting Standards differ from each other, but also have similarities. One difference is that when it comes to consolidation, GAAP tends to lean towards the system of risk and reward, while on the other hand; the IFRS tend to favor a control model (2). Another difference is between the balance sheet extracts of the individual standards. When it comes to GAAP, there is no specific layout for balance sheets and financial statements (1). Unlike GAAP standards, IFRS takes a more rigorous approach to accounting for these summaries and reports(1). They implement this approach by requiring that a list of minimum items be present on statements. Another difference between the two accounting principles is that both use the first-in, first-out (FIFO) method, however, IFRS strictly prohibits the use of the last-in, first-out (LIFO) method, which is the GAAP companies have a choice between LIFO and FIFO (2). Finally, a key difference that needs to be addressed is the well-known fact that GAAP is used exclusively in the United States, while IFRS is used in over 133 countries (3). A similarity that exists between these two accounting standards is that they include the following in their financial statements: balance sheet, income statement, statement of changes in equity, cash flow statement and footnotes.
In recent years there has been talk of the United States transitioning from generally accepted accounting principles to International Financial Reporting Standards (5). As a result, the United States’ adjustment of IFRS will bring both advantages and disadvantages. A resulting benefit would be the ability for foreign companies to identify themselves much more easily within the United States using the information available. Another advantage is that IFRS are already widely known, effectively making them more helpful and accommodating, so other nations don’t have to learn new systems. However, with all the advantages, there are also some disadvantages. One of the main disadvantages is that IFRS does not have the level of certainty that GAAP does(5). Without the proper protection, there is more room for fraudulent financial information to emerge. Another disadvantage of moving to IFRS is that people are unsure how to think about something new. Some companies do not know whether the change is worthwhile for their business.
In summary, GAAP vs. IFRS is a much-discussed conversation about globalization. These two accounting systems both have their pros and cons. Previously, I defined what GAAP and IRFS are and made some comparisons and differences between them. Also, I’ve given some pros and cons of the two frameworks. Most recently, I provided positives and negatives about the United States’ transition to IFRS from GAAP.
1. Ernst & Young. US GAAP versus IFRS: The Basics. United Kingdom. To press.
2. Forgeas, Remi. “Is IFRS So Different From US GAAP?” IFRS Resources. AICPA, and Web. April 13, 2014.
3. “GAAP vs. IFRS.” Difference and Comparison. Diffen, and Web. April 13, 2014.
4. “Generally Accepted Accounting Principles (GAAP).” Business Dictionary. Web Finance, nd Web. April 13, 2014.
5. Ernst & Jung. US GAAP versus IFRS: The Basics. United Kingdom, 2012. Print.