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Closing the GAAP

Closing the GAAP

The path is already laid out for convergence to a global standard of accounting, the IFRS. Discussion will be about the process of going from Generally Accepted Accounting Principles (GAAP) to the International Financing Reporting Standards (IFRS). Plans have been made to have US companies adopt the IFRS by no earlier than 2015, if approved this year (IFRS and US GAAP Convergence). While there has been no set date, everyone agrees that they should start preparing for what they call a done deal. Although differences exist between the two, progress is being made to eliminate those and fix the others.

This may seem like fresh news, but the thought of convergence has been discussed for almost a decade. Here are a few milestone moments that indicate that. The Norwalk Agreement signed in 2002, pledges the FASB and IASB to work toward removing major differences in their own accounting standards (Tyson). In 2006, the two once again agreed on a memorandum of understanding outlining some key projects to come with regards to convergence. Some of those projects were in regard of financial statements and income taxes. In 2006 the SEC stopped requiring foreign companies that are affiliated with US, those that have partial ownership or those that involved highly with US financial companies, to comply with GAAP if they have already adopted the IFRS as their accounting standard (Tyson). These are just some of the few steps that have been taken for the upcoming merging.

With the merging assumed to be right down the road, there is still some fighting and differences that have to be resolved with the entire concept. At a roundtable meeting hosted by the SEC in July of this year, they all agreed that no matter how they lay out the standards, the smaller companies will face the most hardship and financial distress (Barron). As Shannon Greene, who is CFO of the small leather supply company Tandy Leather Factory, Inc. said, “I see no benefit to IFRS at all”. Also, she went on to say, “Anytime you ask us to spend money that doesn’t help us sell more product, you get a lot of flak from the senior management team”. The switch also means a change from a rule-based set of standards which is GAAP, to a principle-based set of standards which is the IFRS. GAAP is very rough and detailed, so it allows for a very clear set of what is allowed and what is not. Once a company realizes these standards and finds a way around them, then they can fiddle around with their finances some to make them more appealing. Also, GAAP uses historical cost as its basis while the IFRS uses fair value when talking about assets. Accounting for things at fair value, values the asset according to what the market will pay for it (Barron). These are some the obstacles still at hand to fix to make convergence a reality.

Even though these differences exist, the benefits of convergence with the IFRS are too high and have too much support. Globally, many countries have either already adopted the IFRS or will in the next few years including Canada and India in 2011, Mexico in 2012, and Japan in 2016 (IFRS and US GAAP convergence). These are some of our major trading partners, so having a set standard only makes sense. Another example is if a foreign company were to purchase part of a US entity, the subsidiary would have to adopt the same accounting principle as its parent company so having one set standard globally would allow for a bigger market when buying ownership in other companies oversees (IFRS and US GAAP Convergence). Major firms like Deloitte & Touche, Emst & Young, KPMG, and PricewaterhouseCoopers were in high support in one solo global standard, IFRS (Tyson). As stated in the CPA journal, “The principles-based IFRS standards, rather than the more rules-based U.S. GAAP, better promote the use of professional judgment and result in greater transparency and clarity” (Tyson). With so much support and the logic involved, the merge is coming soon.

Constant progress and cooperation with the merger between GAAP and the IFRS, has made the differences between the two smaller and smaller. The process started nearly a decade ago with a few milestone moments including the Norwalk agreement (IFRS and US GAAP Convergence). Challenges still are ahead going from the rules-based standard GAAP to the principle-based standards of the IFRS (Barron). The global movement towards IFRS with some of the United States major trading partners only makes the decision to merge easier (IFRS and US GAAP Convergence). The overall message to take away is that the “benefits of a single set of worldwide standards exceed the costs of transition and implementation” (Tyson).