What are the Benefits and Challenges of Implementing Global Accounting Standards?
In the last decade, accounting practices have changed dramatically. In an effort to be transparent, auditors have found that they can offer more value to the clients by helping them to find issues before they become problems.
This is where the IFRS (International Financial Reporting Standards) and US GAAP (Generally Accepted Accounting Principles) come into play. However, for companies looking to expand globally and for companies that have already expanded globally, the question is this; which global accounting standards should we use?
What is the US Generally Accepted Accounting Principles
The US generally accepted accounting principles (US GAAP) is a set of accounting standards issued by the Financial Accounting Standards Board (FASB). These standards are used in the United States and a number of other countries.
The purpose of US GAAP is to ensure that financial statements provide accurate and reliable information about the financial condition and performance of an entity. US GAAP is based on the principle of accrual accounting, which requires that revenue and expenses be recognized in the period in which they are earned or incurred, regardless of when cash is received or paid.
US GAAP is also based on the principle of conservatism, which requires that financial statements be prepared in a way that minimizes the possibility of overstating the financial position or income of an entity.
Some of the most important standards issued by FASB include:
• Accounting Standards Codification (ASC)
• Revenue Recognition
• Statement of Cash Flows
• Financial Instruments
• Leases
What is the International Financial Reporting Standards
International Financial Reporting Standards (IFRS) are a set of global accounting standards developed by the International Accounting Standards Board (IASB). The goal of IFRS is to provide a common global language for business, so that investors worldwide can compare financial statements from different companies more easily.
IFRS are used in over 150 countries, and have been adopted by many large public companies in the United States. However, the use of IFRS is not mandatory in the United States, and there are some differences between IFRS and U.S. Generally Accepted Accounting Principles (GAAP).
The IASB is hoping to eventually make IFRS the global standard for financial reporting, but this will require significant effort and cooperation from regulatory bodies and businesses in different countries.
Benefits of Implementing Global Accounting Standards
The benefits of implementing global accounting standards are numerous. The most obvious benefit is that entities will be able to produce financial statements that are comparable across borders. This will allow investors to make better and more informed decisions when investing in companies around the world. In addition, it will also improve the efficiency of the capital markets as cross-border investment will be easier and less risky.
Another benefit of global accounting standards is that it will help to reduce the cost of capital. This is because investors will no longer need to do their own due diligence on each individual company that they are considering investing in. Instead, they can rely on the financial statements that have been prepared using global accounting standards. This will save both time and money and will ultimately lead to more investment in the global economy.
Finally, global accounting standards will help to improve the quality of financial information. This is because companies will be required to adhere to a set of uniform standards, which will make it easier to identify financial statement fraud. In addition, it will also help to reduce the amount of accounting irregularities that occur each year. As a result, investors will have more faith in the financial statements that are being issued by companies around the world.
Challenges of Implementing Global Accounting Standards
Over the past decade, global accounting standards have become an important issue for regulators, investors, and other market participants. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working to harmonize accounting standards in order to reduce the differences between global accounting standards and local accounting standards. However, the process of implementing global accounting standards has been challenging due to a number of factors, including cultural differences, political pressures, and resource limitations.
One of the key challenges in implementing global accounting standards is cultural differences. For example, the IASB is based in London, while the FASB is based in the United States. This difference in geography has led to cultural differences in the way the two boards approach accounting standards. The IASB is more focused on developing principles-based standards, while the FASB is more focused on developing rules-based standards.
Another challenge in implementing global accounting standards is political pressure. For example, the European Union has been resistant to adopting the IASB’s standards because they are too focused on principle-based standards. European Union regulators are more focused on developing rules-based standards in order to ensure that companies are compliant with local accounting standards.
A third challenge in implementing global accounting standards is resource limitations. For example, the IASB has only 18 full-time staff members, while the FASB has over 400 full-time staff members. This difference in resources has led to different approaches to standard setting. The IASB has been more focused on developing consensus-based standards, while the FASB has been more focused on developing standards that are responsive to the needs of the market.
Despite the challenges, the IASB and the FASB have been making progress in harmonizing global accounting standards. In 2013, the two boards released a joint statement on convergence that outlines their plans to harmonize global accounting standards.