There are at least 120 countries adopting IFRS. It has gained an almost worldwide acceptance except for one very significant one – The US (which is the largest capital market in the world) as it still uses GAAP.
Today, many countries are now more pressured than ever to try to eliminate the gap between International Financial Reporting Standards (IFRS) and the US Generally Accepted Accounting Principles (GAAP). This is due to SEC´s adoption of international standards, the current economic instability, and globalization.
The main differentiating factor between IFRS and GAAP is the approach each takes to the standards. IFRS is principles-based methodology while GAAP is rules-based. The GAAP consists a set of complex guidelines aimed at ensuring there are rules and criteria in place for any type of contingency. On the other hand, IFRS is based on the objectives of good reporting and on how that certain objective relates to a specific situation.
In simpler terms, the goal of IFRS is to provide good information and the standards serve as guidelines to attain that goal. GAAP is all about setting rules and guidelines to ensure good reporting.
Why can´t we just fuse GAAP and IFRS?
Fusing both IFRS and GAAP would ease comparisons between companies based in varying regions. The lobbyists claim that the fusion will simplify management, transparency, investments, and accountant training. However, this is not as simple as many would want it to be.
Financial reporting standards vary by country and this is the reason it creates inconsistencies in financial reporting. Merging cross-cultural business ethics and processes into one set of standard can give rise to several problems.
Every jurisdiction and culture shares its own norms or characteristics that is adopted by the majority of constituents. Cultural differences have a strong impact on accounting standards of another jurisdiction which can complicate the convergence of these two standards.
Why won´t the US adopt IFRS?
SEC has time and again expressed the view that a single set of international accounting standards should be developed and accepted by everybody. In fact in SEC´s Strategic Plan for Fiscal Years 2014-2018 it was mentioned that “SEC will continue to promote the establishment of high quality accounting standards in order to meet the needs of the investors.”
So what is/are the problem/s?
- Politics
One opinion is that the hindrance is mainly brought about by Politics. There is a huge reluctance on giving up GAAP standard-setting authority over domestic issuers to an international body with offices in London and Tokyo. It seems as though SEC views IFRS as lacking in consistent application, leaving too much leeway with interpretation, and is underdeveloped in many areas in comparison to GAAP where there are already detailed and accepted guidance and established practices in order to protect the US investors. SEC further stated that investors do not believe in compromising the high-quality standards of accounting for the sake of uniformity.
Judging by that statement alone, it seems as though the political will is lacking on the side of SEC and FASB to truly find a way to converge IFRS and GAAP.
- Culture
As mentioned earlier, merging cross cultural business ethics and processes is not an easy task. The US imposes high professional liability which makes us understand why accountants in the US would want a wealth of very elaborate rules rather than “just principles”.
In the US when something goes wrong, accountants and auditors get easily blamed which is why a significant number of accountants and CFOs in the US are not embracing the change due to the litigious nature of businesses in the US. They need that security blanket and protection that GAAP affords them through its very specific rules.
- Wrong focus
When we come to think of it, it is strange that after more than a decade of hard work among the best accounting minds beginning from 2002 IASB/FASB Norwalk, there is still no indication of when US-IFRS and US-GAAP will converge.
Could it also be because FASB is focusing on the wrong issues? Since 2015, FASB has been working on its own on certain “non-convergence” technical issues without even consulting IASB. Instead, they issue new guidelines that at times goes against IFRS.
In fact, even in certain “convergence projects”, the guidance seem to depart from each other. A good example is their differing opinions on revenue recognition standards or detailed accounting rules from the leases and projects.
Conclusion
In the end, this becomes more of a choice between rules and principles. A question of whether or not the hypothetical “US investor” that SEC seeks to protect will see the benefits of IFRS more than just what seems to not be working with it. Whether or not SEC truly believes that a single set of objective is practical and achievable in the US in the near future.
How about you? Are you for or against the convergence of IFRS and GAAP? Do you think it makes sense to create a completely new set of standards? Or Should the US just adopt IFRS?
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