International Financial Reporting Standards
(IFRS): An AICPA Backgrounder
From the Journal of Accountancy. Sep 2008. Vol.206, Issue 3
This paper will focus on the coming convergence of the International Financial Reporting Standards (IFRS) with Generally Accepted Accounting Principles (GAAP) in the United States. IFRS is a growing acceptance of financial reporting worldwide. More than one hundred countries and 12,000 companies have or plan to adopt IFRS in the near future. In this paper, I will express the benefits of the convergence; differentiate GAAP versus IFRS; and the challenges of IFRS.
The main benefit for the convergence of IFRS is that it is highly comparable. IFRS allows companies to compare financial statements of reporting entities from different countries. Comparability is an immense reason for convergence because it decreases investor’s uncertainty, reduce risk, and increase market efficiency. Other benefits of the convergence include: clarity and consistency. Financial statements that are more consistent can offer a clearer view into a company’s operations and performance. Therefore, IFRS makes it easier for investors, stakeholders, buyers, and sellers to compare companies across the board.
Some differences of IFRS and GAAP includes IFRS is principles-based versus rules based, it provides less details than GAAP, and does not allow certain reporting and valuations that GAAP allows (i.e. LIFO valuation and extraordinary item reporting). IFRS is also considered to be broader and only covers about 2,000 pages, while GAAP has about 2,000 pronouncements, many of those being more than a hundred pages long.
Although IFRS is considered to be one of the biggest revolutions in the accounting industry; it comes with challenges and ongoing efforts that must be addressed. Many countries that are planning to converge to IFRS may never obtain a hundred percent compliance from companies. This action could lead to more incomparability, which is one of...