The Complex World of Accounting Standards

Matt Pertzsch, for GPA -- Anyone who has travelled abroad and checked the weather knows that some arithmetic is required to convert the reported temperature from Celsius to Fahrenheit. In many foreign countries, Americans traveling by car would have noticed the speed limits reported in kilometers, not the familiar miles. Similarly, the global standard of the metric system reminds American tourists that things are measured differently in other parts of the world.

These conversions should be familiar to any world traveler. However, even the most experienced jetsetter may not be aware of the differences in accounting standards worldwide. Here in the United States, we use the General Accepted Accounting Principles (GAAP) while the rest of the world typically uses the International Financial Reporting Standards (IFRS).
The main reason there are two sets of standards comes down to simple methodology. The United States’ GAAP is a “rules based” method of accounting. The GAAP attempts to establish a universal set of guidelines that can then be applied to any accounting situation. Unwavering adherence to these rules implies GAAP compliance.

On the other hand, the IFRS is a “principle based” method of accounting. Instead of providing a set of rules, the IFRS begins with the objective of financial reporting and works backwards. Thereby, guidance is given as to how each objective relates to a specific accounting situation.
It’s tempting to think that these differences in accounting standards don’t have major implications. If we’ve gotten by using different standards of measurement for so long, it stands to reason that differences in our book keeping wouldn’t matter. However, the ramifications of having two separate standards for accounting are actually quite severe.

Imagine a common business situation from a personal investor’s point of view. You are thinking about buying stock in one of two similar companies but one is based in the U.S. and the other in Europe. When you go over their financial statements, you find that they are prepared in compliance with the conflicting standards. As if doing financial valuations wasn’t difficult enough, compensating for the difference in accounting methods makes the task all the more complicated.
The corporate world is hardly immune to these financial quagmires. As we know, many businesses today are multinational. A company may be based in Philadelphia, but maintain several branches of operation abroad. Should they use separate accounting methods for each branch depending on its location? Do they just use one standard as an umbrella to cover them all? In the end, it seems that the only people benefiting from the differences in these standards are the accountants who are paid to reconcile them.

The simple solution is for all U.S. firms to switch to the IFRS. Interestingly enough, the biggest protestors of this tactic are the businesses themselves. First and foremost, U.S. firms believe that the cost of converting their financial statements for IFRS compliance would far outweigh the benefits. Firms would end up spending billions nationally in making the conversions, not to mention the amount of time and manpower it would take. Furthermore, firms also feel that the public’s perception of the financial statements’ integrity would be lowered should they be forced to become IFRS compliant. Still recovering from one of the worst financial crises in modern times, the last thing anyone wants to do is lower consumer confidence.

Some have recommended creating a whole new set of standards that attempts to combine the GAAP and the IFRS. This new policy would draw ideas from both schools of thought into the most streamlined standards possible. Then, over time, companies around the world would slowly convert to the new system and provide the business world with a uniform and transparent method of accounting. Naturally, this would take a tremendous amount of effort and cooperation on the part of the international business community. Whether or not it is up to the task remains to be seen. 

Photo courtesy of americancpe.com/