Major effect switching accounting standards from NGAAP to IFRS
The US GAAP (Generally Accepted Accounting Principles) is a set of commonly acknowledged principles in accounting that determine the earning and value the assets of American companies for the last 75 years. Companies outside the U.S., have been using different globally standards called international financial reporting standards, IFRS. However, the country is now adopting the global standards, but it is not a smooth transition. Experts have diverse opinions on the implications of this shift but they all agree that the move has both positive and negative impacts (Lin S, Riccardi W & Wang C. 2012, 648). It goes without saying that the GAAP and the IFRS are entirely different because the former is more form driven and based on rules. On the other hand, IFRS is more reliant on perceptions and far-reaching principles. It typically focuses on the fundamental substance of the business than on its legal form. This essay aims to discuss the potential effects, and ethical issues brought about by the US transition from GAAP to IFRS.
Effects of Switching From GAAP to IFRS
In 2002, the IRFS started acquiring momentum after the European Union made a decree that all its member states should start using them. Between 2003 and 2005, over 7000 companies went through the GAAP to IFRS transition. Today, over 100 countries use IFRS, and the U.S. has recently joined them. The worldwide adoption of IFRS is a fundamental economic transformation that will give rise to a critical line of research. As an accounting professional or owner of any business, it is essential to understand the variations between these standards. As such, this knowledge helps company executives and entire staffs swiftly manage companies both locally and globally.
Due to the differences between the two set of principles, a wide range of transition issues have been experienced. It is expected that companies will be changing how they do their income and loss calculation as well as other stuff on their balance sheets as well as income statements. The US is used to set of principles that give little room for interpretation or exception. In other words, US GAAP provides that all transactions must abide by a specific set of rules. Therefore, the US should expect different interpretations of the similar tax-related issues since IFRS is based on principles (Soderstrom, N. & Sun, K. 2007, 676). Also, the US companies are used to having the LIFO (Last In, First Out) method of estimating inventory under the GAAP. Unfortunately, the IFRS does not allow the LIFO method because it doesn’t often reflect a precise flow of stock thereby resulting in reports of extraordinarily low levels of income.
Besides the different methods of tracking inventory, GAAP and IFRS accounting are also dissimilar regarding the reversal of inventory write-down. For instance, the GAAP has it that upon an increase in the market value of properties, the write-down amount can’t be reversed. However, in a similar situation under IFRS, it is possible to change the write-down amount. According to Verschoor, C. (2010, 13), this means merely that GAAP is exceedingly wary of inventory reversal and doesn’t reflect any positive alterations in the marketplace. Similarly, changing to IFRS says that US companies’ development costs can be capitalized so long as they meet specific criteria. In that case, it will allow businesses to leverage devaluation of fixed assets. With the other accounting standard, it is a must that a company expenses development costs the same year they occur, and they cannot be capitalized.
The expansion of the ethical challenge for the auditors and preparer accountants after this transition is less understood. In the process of researching, it becomes evident that IFRS is being termed as just an option for the private or not-for-profit businesses in the U.S. It is also very significant to note that public companies outside American have been using IFRS and picking the portion of it that they choose to implement while leaving out the remainder (Yu, G. & Wahid, A.S. 2014, 1900). Even by converging how the two accounting methods treat specific issues, there is no way to change the fact that IFRS is principle-based and GAAP has become increasingly based on rules. The moral grays in this transition arise from the fact that more professional judgments will be needed. In that case, the IFRS is likely to rationalize the methods that have been showing the financial position of a company as being better than it indeed is.
It is evident from this essay that the IFRS accounting has been widely adopted and accepted for the past 30 years or more. However, the US is the most extensive capital market in the world, but it has been reluctant to fully integrate IFRS into its financial reporting arrangement notwithstanding the accounting method being recognized on all continents. Therefore, there has been an array of positive and negative effects resulting from the transition. Most importantly, it is widely understood that by adopting this method, the U.S. financial reporting system will shift from rules to principles. Similarly, companies will have to change their inventory methods, and they will have the ability to reverse inventory unlike under the GAAP method. Also, companies will have the ability to capitalized development cost. However, despite the efforts to converge these differences, there is no way transitioning from a rule-based standard to a principle-based one is going to evade significant ethical issues.
Lin, S., Riccardi, W. and Wang, C., 2012. Does accounting quality change following a switch from US GAAP to IFRS? Evidence from Germany. Journal of Accounting and Public Policy, 31(6), pp.641-657.Soderstrom, N.S. and Sun, K.J., 2007. IFRS adoption and accounting quality: a review. European Accounting Review, 16(4), pp.675-702.Verschoor, C.C., 2010. IFRS would escalate ethical challenges for accountants. Strategic Finance, 92(1), pp.13-16.Yu, G. and Wahid, A.S., 2014. Accounting standards and international portfolio holdings. The Accounting Review, 89(5), pp.1895-1930.
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