After the stock market had crashed in 1929 our federal government had established the Securities and Exchange Commission (SEC). It was the SEC’s job to help develop and standardize financial information that would be presented to stockholders. The SEC now requires all public companies to adhere to GAAP. Although they have the power to enforce GAAP in the private sector, they decided to allow the American Institute of CPA’S (AICPA) to enforce financial standards. The AICPA established the Committee on Accounting Procedures and the Accounting Principles Board. These two organizations failure to narrow areas of difference and inconsistency in GAAP had led to the creation of the Financial Accounting Standard Board (FASB).
GAAP includes a mixture of over two thousand documents that have been urbanized over the last 70 years or so. All of these documents have made it very hard to research certain topics in GAAP without obtaining old or incorrect answers. FASB was able to solve this problem by constructing the FASB’s GAAP Codification. This had organized all authoritative U.S. GAAP in a single location. It made GAAP research much more effective and efficient by providing one place for all literature related to different accounting topics. It simply changed the way GAAP is documented, presented and updated. It did not create any new GAAP but eliminated nonessential information like reductant document summaries, conclusion sections and historical content.
Companies outside of the United States often prepare financial statements using standards different from U.S. GAAP. The two sets of accounting rules accepted for international use are GAAP and International Financial Reporting Standards (IFRS). IFRS was issued by the London-based International Accounting Standards Board (IASB). U.S. companies overseas are permitted to use GAAP and foreign companies listed on the U.S. exchange are required to use IFRS. Although GAAP and IFRS are quite similar most parties find that global markets will benefit from only one set of accounting standards being used. Over 120 countries around the world have adopted IFRS and the European Union requires all of its companies to use it. The SEC believed since most companies throughout the world are using IFRS that they would require all U.S. companies to use it by 2015. It is now 2015 and the U.S. is still adhering to GAAP. There is hope for a conversion of the two systems with the official obligation of both FASB and IASB to converge GAAP and IFRS. The two boards have acknowledged some short-term and long-term projects that will jump start the conversion. These projects have involved each sides system adopting rules of the other sides system, making GAAP and IFRS more consistent.
Generally U.S. GAAP is identified as being more rule based where IFRS is seen as more principle based. Recently with the attempt to converge the two systems FASB has issued a short-term project with a rule that permits a fair value option for financial implements. On the other hand IASB has finalized a short-term project associated with borrowing costs, which has made IFRS more regular with GAAP. There have been many long-term projects that relate to issues of revenue recognition, the conceptual framework and leases. These projects are merely just a step in the right direction for the long-term goal of converting GAAP and IFRS into one set of accounting standards to be used throughout the world.
Converging into one set of accounting standards is easier said than done. This is most likely why the date the SEC had originally set had been pushed back. There are many different accounting topics and many disagreements that may arise between FASB and IASB. For example one of the major difference between U.S. GAAP and IFRS is that U.S. GAAP functions in an atmosphere with real methods and IFRS favors accrual methods. U.S. GAAP uses real methods primarily because firms are less able to adjust earnings when they are spiraling downward. This forms a more effective way of detecting error in financial records and also creates enforcement of efficient reporting. Real methods give outside investors more creditable ideas on values of firms. Firms that are seeing a decrease in earnings may favor IFRS accrual method because of these reasons. With that being said there may be a lot of unhappy firms out there if IFRS sides with U.S GAAP on this topic. There is a large amount of topics that IASB and FASB will have to decide upon but both side will have to compromise if they truly want to converge into one set of accounting standards for the global market. Who knows when the complete convergence will happen?
GAAP represents the accounting system used in the United States. IFRS represents the international accounting standards.