In the G-20 summit (the richest 20 countries on this planet), and in the midst of the financial crisis the world was facing, leaders were discussing accounting rules!! Not debits and credits!
I don't think they go into that detail! But what they are demanding from the accounting profession is to come up with one set of accounting rules that all companies can use regardless of their location. OK,... what does this have to do with the financial crisis? And how would one set of accounting rules help in solving the problems of the world's economy?!
Let's go over the definitions first: IFRS stands for International Financial Reporting Standards which are established by the International Accounting Standards Board (IASB). GAAP stands for Generally Accepted Accounting Principles which are established in the US by the Financial Accounting Standards Board (FASB). Basically, these are two sets of accounting rules dominating the accounting profession globally with few differences ... few but might amount to millions of dollars!
An example of the differences is in the methods allowed in inventory costing. Last-In First-Out (LIFO) is allowed, and widely used, in the US while it's NOT permitted under IFRS - most companies applying IFRS either use Weighted Average or First-In First-Out (FIFO). In one of our accounting training programs, we apply different methods to the same data and we notice that net income under FIFO is higher by $1.5MM had we used the LIFO!
As the world is growing to become one big global economy, the need for uniform accounting standards across different countries has risen. To put it simply, let's assume I'm a bank in London and I only have one loan to give out, and two companies have applied for this loan: one company based in NY and a second based in Paris. I would not be able to easily compare the financial health and performance of the two companies because each one is using different accounting rules.So, how would one set of accounting rules help in easing the effect of the financial crisis?
Two words: reduce costs! "Most of the demand for international standards can be traced back to the concept of reducing costs - for owners, creditors, preparers, analysts, and the general public". And when costs are down, cash moves more freely (equity and debt financing) and business transactions across several countries become more feasible.
Since 2002 onwards, IASB and FASB have been working hard to converge those two sets of accounting standards, attempting to eliminate differences, as well as to improve the accounting rules. Slowly but surely, many countries are moving away from applying GAAP and towards adopting IFRS (e.g. European Union, Canada, India, etc.). Recently, FASB has allowed foreign companies listed on US stock exchanges to publish their financial statements using full IFRS and eliminated the requirement for reconciling their financials to US GAAP.
In Meirc, this year we are offering an accounting program that will highlight the differences between IFRS and GAAP. Here is the link if you are interested:
IFRS Versus GAAP
1) Niswander, F. and Conover, T. (2009). "International Versus U.S. Accounting: What in the World is the Difference?", AICPA, p 1-8.
What do you think? Do we really need one set of accounting standards? If you are an accountant, will you be affected and how?