International financial reporting standards are the biggest change to the accounting profession in history. Accountants all over the world -- over 120 countries -- are applying IFRS to financial statements, doing away with generally accepted accounting principles. The United States, as of mid-2011, has not announced it will change over, but it is widely expected that the time will soon come.
Principles Instead of Rules
Despite the "P" in GAAP standing for "principles," U.S. GAAP is very much rules based. There are explanations for virtually everything an accountant may encounter while preparing financial statements. Instead, IFRS encourages more principles-based thoughts, allowing accountants to think for themselves. "CFO Magazine" reported that respondents to a Grant Thornton survey found that many CFOs believe current standards are too complex for investors to understand.
Generally accepted accounting principles are developed by individual countries. For example, the United States has U.S. GAAP. Japan has Japanese GAAP. Before Canada transitioned to IFRS for public companies, it had Canadian GAAP. Since these rules were developed by each country's accounting standards board, different rules and interpretations could exits across borders. Since IFRS is an international standard developed by the International Accounting Standards Board, a Canadian and French accountant are using the same rules and can interpret each other's statements without any extra education.
International financial reporting standards do not necessarily require everyone to reach the same answer. Meanwhile, GAAP usually does. Sir David Tweedie, chair of the IASB until June 2011, was reported by "The Bottom Line" as saying that it's fine for two people using IFRS to come to different answers, as long as they are close enough to each other. Under GAAP, specific answers require a lot more work by going through different interpretations. The thought is that specific and accurate numbers are needed to guard against litigation.
The fear among IFRS critics is that principles-based accounting standards will create opportunities for unprincipled people to make bad decisions or even criminal choices, and that there could be easy repetitions of financial collapse due to accounting scandals. Another concern is that transitioning to IFRS would be a costly exercise without much gain as IFRS has not been proven to improve financial reporting, nor will it save money for companies.
- "CFO Magazine"; Principles vs. Practices; Scott Leibs; June 1, 2008
- "The Bottom Line"; Think For Yourselves, Tweedie Urges; Adam Malik; January 2011
- IFRS.com: Is IFRS That Different From U.S. GAAP?; Remi Forgeas; June 16, 2008
- Ernst & Young; U.S. GAAP vs. IFRS; January 2009
- Accounting Today; IFRS is Dangerous to Your Health; Alfred M. King; Jan. 11, 2010
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