The Global Accounting Standard
The International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP) are the two sets of standards and procedures used by companies to compile their financial statements. GAAP is the set of standards used in the United States while IFRS is used internationally by almost all other major economies. The convergence of these into one set of globally accepted accounting standards has been a major topic of discussion. There are benefits to having everyone follow the same set of standards internationally along with some challenges.
There are several advantages of having one uniform accounting standard globally. A major benefit is being able to easily compare companies that are located in different countries. Currently, an investor or creditor that is considering an investment or checking the credit risk of a company may have issues due to differences in the accounting standards of the companies. An investor must reconcile two companies’ financial statements into the same basis of accounting in order to compare them. Different reporting standards can be deceiving for creditors causing two companies having similar success to appear very different than one another. Having one set of global standards would also improve the international expansion process. Many companies would advance from expanding into other countries but the cost of complying with a different set of standards and changing to meet requirements holds them back. “In some cases, this would nearly double the company’s accounting costs.” Many are losing out on this opportunity due to discrepancies in accounting standards. One global standard would eliminate these discrepancies. One standard setting body would make the international rules instead of each country having its own standard setting body, relinquishing the disparity among countries.
Merging the two into one set of standards has many benefits but with all of the changes also come challenges. In order for this to work all countries involved have to cooperate and be able to adjust. “Countries have different starting points, different business cultures, different regulatory environments, different financial reporting objectives, and different legal systems making it difficult for standard setters around the world to agree on the same accounting alternative.” Even if accounting standards become the same in each country laws and other regulations would not be which would hinder the usefulness of a global standard. Cultures, religion, and lifestyles vary in each country which cause some standards to make sense in one country and not translate well into another. There have been attempts in the past to have GAAP and IFRS be written in the same words and phrases. This did not work smoothly; words are interpreted differently causing descriptions to be interpreted differently.
Some disagreements between the standard setters for IFRS and GAAP have stopped them from coming up with one global set of standards. Different views on financial instruments, leasing, revenue recognition, and insurance contracts have halted the convergence. Although they can’t agree on all standards and procedures they are in the process of removing as many differences between the two standards as possible. The Norwalk Agreement was signed in 2002, stating the commitment of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) in working together to make their existing financial reporting standards compatible and to coordinate their future work programs to ensure once achieved, compatibility is maintained. This agreement is still in place today and has helped get rid of several differences between the two standards.
Whether it is through convergence of the two standards or the United States deciding to adopt IFRS, having one global accounting standard is the goal of many organizations. The various challenges and short term disadvantages make it difficult for each country to agree on one standard. Discrepancies do exist between standard setters and with change always comes adjustment. One global standard may or may not be plausible with all of the differences in culture and law among countries. Since the signing of the Norwalk Agreement in 2002, substantial progress has been made toward making IFRS and GAAP more compatible. We will see if this progress continues and if standard setters can one day agree on one global set of accounting standards.