Globalization's Affect on Accounting Standards: GAAP vs. IFRS
Globalization's Affect on Accounting Standards: GAAP vs
. IFRSOver the years, globalization has had an impact on many aspects of business; from the outsourcing of labor to the trade relations, the effects of globalization are a frequent factor in business operations. Recently this idea has spread to the accounting standards of the United States. GAAP, or generally accepted accounting principles, are the set of rules that the Unites States have been practicing since accounting standards originated, but as of 2008, the Securities and Exchange Committee has announced that this will no longer be the case. Between the years 2014 and 2016, the United States will be changing over to IFRS, or the International Financial Reporting Standard. To truly comprehend this significant change, there are a few components that must be understood: what is changing, the reasons or advantages for the change, and the disadvantages of this change.
The first significant component revolves around what changes are actually taking place, and although there are many, there are three that are highly significant. In the past, the United States has accepted three separate methods for recording inventory, FIFO, LIFO and weighted average, but this is no longer the case. With IFRS, LIFO will no longer be accepted. LIFO, or last in first out, was a way of recording inventory where a company would use the most recently purchased items as the first sold. This method was used as tax deferral because the company could sell newly purchased units that were bought at a higher price first, thus claiming less income and tax on the sale.
The second major change involves the valuation of assets. Instead of documenting the values using the book value, IFRS will implement the use of fair value accounting. In fair value accounting, a company is allowed to document changes in net value of assets and the values of liabilities owed based on the actual market value. As an example, if a company bought land twenty years ago for a set amount and over that time the value tripled, a company would document that change in their books. Another important part of this change is that the writing down of an asset will change from a double step write down, seen in GAAP, to the single-step write down in IFRS. This change will more than likely make write downs a more common occurrence.
With these changes are obvious advantages, which provide the reasoning for implementing this switch. IFRS is already used in over one hundred companies world-wide; the comparability between companies will greatly increase, and from this come two more benefits. Since nearly everyone will be using the same financial recording methods, information will be much easier to obtain and understand for shareholders. In addition to information being more available, it will also be cheaper. In the past, multinational companies had to prepare financial statements that would match standards for in the United States, but also had to prepare statements for the countries that they were doing business with. With the standardization of all of these statements, companies will no longer be forced to prepare multiple statements in different formats.
As with any given change, there are some disadvantages as well, the largest of which hinges on the education process. Since CPA's in the United States have already been tested and accredited only in GAAP standards, there is a need for further education. This means that many professionals that have been in business for years may have to go back to school to learn about all of the changes that they will be forced to apply to their business. Not only will this affect older accountants, but up and coming accountants will see these changes too. The education process for accounting students will have to change to account for IFRS, so new classes and textbooks must be used. In addition to all of those changes, the CPA exam itself will need to be altered to reflect these new standards.
All in all, this change should benefit the United States. Although there are some downfalls such as requiring changes in the current accounting education process and changes in taxing methods, it will make financial statements uniform across different countries. These changes have the potential to ultimately reduce the preparation costs of financial statements and increase comparability and understanding between all countries and shareholders. This switch will not be easy and will take years to successfully switch over, but in the end IFRS could have many benefits for United States business. Globalization's Continuing Impact on American Accounting Shaw To Host Conference Call To Discuss Global Strategic Partnership Announcement Brummie - China 3d Cinema System - Global Customers Projects Manufacturer The Impact of Globalization on Small Buisnesses Discover Why Global Information Network Members Feel The Group Provides Huge Benefits Global Energy Drinks Report 2010 Bioplastics: Technologies And Global Markets Global Active & Smart Packaging Market For Food And Beverage Kovair Global Lifecycle What Fees Are Involved In Cross Border Shipping? Hearing Aid Purchasing Options Globalization: the Good, the Bad, and the Uncontrollable Go on and Save Big Bucks by Purchasing a Used cnc Machine