Globalization has led most countries to follow and teach IFRS principles. US-based companies follow GAAP rules, which creates complications for US companies wanting to do business internationally. Both accounting practices provide accurate and useful interpretations of a company’s financial situation. However, a comparison of a financial statement that was made following GAAP with a statement that follows IFRS could result in material discrepancies.
The United States uses GAAP or Generally Accepted Accounting Principles for financial reporting. GAAP are rules that must be followed in financial statements and are only acceptable within the US Unlike GAAP, IFRS or International Financial Reporting Standards are principal based. This means that when business transactions occur, GAAP must go through a certain progression of steps to record it. While IFRS can interpret the transaction in different ways. Another difference with principle-based IFRS vs. rule-based GAAP is that you can’t find a loophole in principle as easily as you could find a rule. Since the principles are more vague than a specific rule, it covers more potential threats to misinformation. An example of this would be the historical cost used in GAAP versus the “actual value” used by IFRS for fixed assets. Historical cost uses the price paid for the asset while “actual value” uses the estimated value of the asset today. “True value” is extremely useful for companies investing in something for their future economic benefit.
Another face of corporate America is double bookkeeping. To report and audit financial information, US-based companies must use GAPP, which is useful when comparing financial statements with other US-based companies or internally within the business for management purposes. However, for international information, and in more than 110 countries, the International Financial Reporting Standards are used. (Bannister) The double-accounting work is also extensive. An example would be IFRS not recognizing LIFO as an acceptable inventory system. If the cost of a product is increasing, the use of LIFO saves the company money because higher cost compared to gross income results in less taxable income. If a company using LIFO needed to report internationally now, any financial statements involving inventory would have to be reassessed to comply with IFRS. (Intuit Team) This double accounting creates an additional disadvantage in addition to doing more work for US accountants.
Accountants who studied in the United States are taught how to comply with GAAP when making financial reports and the CPA exam certifies them to do so. However, they are not taught to comply with IFRS principles, so they may not be preparing the best IFRS compliant financial statements. This is bad for the company reporting the information because it may not be the best possible report for the company. It is also detrimental to all accountants taught in the United States. In an increasingly globalized world economy, accountants taught to satisfy the accounting rules of a single country are less valuable than an accountant who can satisfy accounting principles in more than 100 countries.