Accounting is usually considered an exact science, but it’s only exact if accountants apply the same principals to every company. To standardize accounting practices in the international market, the International Accounting Standards Board developed the International Financial Reporting Standards, known as IFRS, to help guide accountants and aid in consistency. IFRS standards aren’t usually used by businesses in the United States, where Generally Accepted Accounting Procedures, known as GAAP, are the dominate accounting standards.
Adoption of IFRS Standards
GAAP standards may be commonplace in the United States, but worldwide, IRFS accounting standards are much more prevalent. By 2013, the IASB estimates that 150 countries will have implemented IFRS standards of accounting, with many of them mandating the principles. Many major financial markets, such as the European Union and Australia, adopted the standards in the first decade of the 21st century. Canada, Japan and India adopted the standards in 2011, and Mexico will adopt IFRS standards for its 2012 tax year.
Differences Between IFRS and GAAP
Major differences separate the GAAP and IFRS standards, and each system’s rules approach revenue, costs and liabilities with different rules. Three major areas — the definition of revenue, the value of intangibles and accounting standards — separate the standards, with GAAP allowing more flexibility for retroactive accounting and period specific events. IFRS standards require consistent reporting based on fixed periods, comparing changes in a company’s accounts and value to prior periods, a format that isn’t required by GAAP standards.
Advantages of IFRS
Proponents of IFRS urge a worldwide accounting standard as the only accurate way to compare businesses in the global market. Its standardized reporting format and rules make creating financial statements for worldwide use possible, instead of the common practice of reformatting and redeveloping reports to fit other markets’ standards. This consistency, proponents claim, leads to cheaper capital as well as an increases confidence in international investors because they can more easily interpret statements. The IFRS’s rules-based standards lead to more accountability rather than the sometimes subjective principle-based standards of the GAAP.
Disadvantages of IFRS
Some accountants believe that IFRS’s rules-based standards aren’t more accurate than GAAP principles, and are just as much open to interpretation as American standards. Studies implemented in the European Union in 2005 revealed that companies that implemented the standards did so inconsistently, maintaining some of their country’s former principles in the transition, according to "Entrepeneur" magazine. Because of this, some argue that IFRS accounting isn’t as consistent or prone to easy comparison as its proponents claim.