The End of Generally Accepted Accounting Principles

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Table of Contents

Introduction
Benefits
Conclusion
References

Introduction

For many years, the GAAP (Generally Accepted Accounting Principles) set of accounting principles have been used by major accounting firms around the world, and have acted as a standard framework for universal accounting in recording and summarizing, and in the preparation of financial statements. However, due to the emergence of the International Financial Reporting Standards (IFRS) and its subsequent popularity, there has been an urgent need for all countries to adopt a single accounting standard (CFO, 2011). Although each of the two standards has known weaknesses, many accounting bodies prefer the IFRS, consequently, studies aimed at streamlining IFRS and doing away with GAAP has been ongoing. Although this could take many years, it will result into all accountants adopting a single accounting system, which will restructure the field of accounting.

Benefits

Even though several accounting bodies have streamlined their accounting principles to converge IFRS and GAAP, differences continue to persist between the two, and hence the IFRS needs to modified so that the two standards can converge into a newer IFRS, and do away with the GAAP (Porter & Norton, 2010). GAAP requirements for recognition, measurement, presentation and disclosure of transactions vary significantly from those in IFRS, the latter requiring more extensive disclosures. In addition, some issues are addressed only in one of the standards, for instance, GAAP does not cover accounting for agricultural activities while the IFRS has a particular entry for that issue. The GAAP has certain industry –specific standards, such as for investments, while the IFRS lack such provisions (Walton, 2009).

Apart from the adopting a common principles, on of the reasons why a shift from GAAP to IFRS would be a positive move is that it will further promote globalization. IFRS is currently being used in more than 100 countries, and if the rest follow suit, it will be easier for companies and businesses in different countries to make deals with each other (Walton, 2009). The new system would also allow shareholders and stockholders in other nations to have a better economic indicator of how companies in other nations are doing. Multinational would also benefit as they would be able to streamline their operations, financial reporting standards, auditing, training, and general company financial principles. This would allow for accuracy and consistency in financial recording and reporting.

Due to the several provisions provided by the IFRS, such as clarity, extensive disclosures, and provisions for several forms of transactions, its adoption by all accounting bodies would ensure that financial makers would use their professional judgment to handle a particular transaction (Walton, 2009). This would lead to less time being spent in accounting processes and also eliminate the need to follow complicated accounting rules. It will also allow accountants to keep statements in a simplistic ad easily comprehensible manner for shareholders, potential investors and parties interested in the financial records (Porter & Norton, 2010).

Conclusion

One of the major drawbacks of adopting IFRS would be the mandatory requirement of training accountants on the newer methods. This would amount to more capital outlay to fund the program. Hence, companies are likely to experience losses during the formative of adopting IFRS, however, such losses would only be short-term and the gains of adopting a common and improved accounting standard would offset such losses. To reduce the challenges attributed to the impending changes, companies ought to start an early switch over and allow a transition period so that the switchover becomes as smooth as possible, with very minor interruptions. Besides, firms could be required to hire additional financial advisers and staff to help with the switchover. The switchover to IFRS will not be an easy one, but in the long-term, it will provide clarity in financial statements and enhance globalization.

References

CFO. (2011). IFRS vs. GAAP. Web.

Porter, G. A., Norton, C. L. (2010). Financial Accounting: The Impact on Decision Makers. Mason, OH: Cengage Learning.

Walton, P. (2009). An Executive’s Guide for Moving from US GAAP to IFRS. NY: Business Expert Press, LLC.

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The End of Generally Accepted Accounting Principles

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