Globalization has greatly influenced accounting practices worldwide. The reason for this is that the laws are varied in every country. US Accountants are required to follow the GAAP. Currently, more than 115 countries worldwide use international financial reporting standards. As a result of globalization, the Securities and Exchange Commission (SEC) plans to use all US companies by 2015 by 2015. (Kieso)
Accounting officers understand that the global business is beneficial from a single set of accounting standards. One of the main sources of documents in GAAP is the Financial Accounting Standard Board and the International Accounting Standards Board issued by IFRS, both affirming that GAAP and IFRS are merged by concluding an agreement. This is often referred to as the Norwalk Agreement and notes that the two Governments will make existing financial reporting standards as compatible as possible and align their future work programs in order to ensure that compatibility is sustained once. (Kieso) The consolidation of accounting standards will not be as easy to perform as GAAP and IFRS contain significant differences.
The first major difference between GAAP and IFRS is that GAAP is considered a "rule-based" "principle". The fact that GAAP is considered to be rule-based means that research focuses more on the literature and the concept of IFRS is at the heart of the review of facts. In a principle-based accounting system, the area of interpretation or discussion can be clarified by the determining forum for standards and provides fewer exceptions than a rule-based system. (Forgeas) The SEC tries to find the right balance between "educated" professional judgment and "fictional" professional judgment. (Forgeas) As long as these two standards exist, the same accounting situation can be done in different ways, affecting the legitimacy of the financial statements. For example, GAAP follows LIFO and FIFO methods for calculating inventory costs, but IFRS only follows the LIFO method. Support for the use of different methods will certainly change the interpretation of financial statements; which influences the judgment of external users viewing financial statements.
Other issues come from the conceptual differences between GAAP and IFRS. Some of these questions are how the income statement, earnings per share, development costs and intangible assets are reported. GAAP states that extraordinary items are shown under net income, but extraordinary items under IFRS are not segregated in the income statement. According to GAAP, earnings per share are averaged by the averaging of each transitional period incremental share, but IFRS does not count on average. Development costs are recognized under GAAP, but the development costs of the IFRS can be capitalized. (Forgeas) Intangible assets are recognized only if the asset would have future economic benefits and reliably assessed the IFRS but the recognition of GAAP's intangible assets at fair value. (Nguyen)
Globalization has caused these issues because many companies extend their operations to other nations. Companies in the United States are shipping to other countries to reduce costs and reduce the amount of regulations that they will follow. The convergence of GAAP and IFRS is extremely important, so business transactions can be reported correctly. This raises another question; what about the education that is needed to implement many of the accounting standards? The United States has over 650,000 Certified Public Accountants (CPAs); which means that the practical application of GAAP and IFRS convergence should be slightly re-formed. (Harper) Reshaping thousands of people will be extremely costly and in most cases will not fall on the individual who pays for the training; this cost is likely to be added to the cost of the companies. After training, companies need to move on to the new reporting method; many departments will need to change processes. Once again, these changes are always simpler than ready and take time to get ready.
This is a list of how globalization affects accounting standards and the differences between GAAP and IFRS. effect. While it may be difficult to combine the two standards, it is undoubtedly better to use only one standard package potentially globally. In summary, the migration process takes time to uncover the chance and the end of the reporting of specific financial statements, but will lead to a better management of business at international level
Forgeas. (N.d.). AICPA | http://www.IFRS.com . Printed on April 13, 2015.
Harper. (N.d.). Retrieved April 13, 2015
Kieso, D., & Weygan, J. (2013). Intermediate Accounting (15th Edition). Hoboken, NJ: Wiley.
Nguyen. (January 13, 2010). What are the most important differences between IFRS and US GAAP? Printed on April 13, 2015.