How Globalization Is Affecting US Accounting

Globalization has led most countries to follow and teach the principles of IFRS. US-based companies follow GAAP rules, causing complications for US companies wanting to do business internationally. Both accounting practices provided useful and accurate interpretations of a company’s financial condition. However, comparing a financial statement that was made under GAAP with a statement that follows IFRS could lead to significant discrepancies.

The United States uses GAAP or Generally Accepted Accounting Principles for financial reporting. GAAP are rules that must be followed in financial statements and are only acceptable within the US Unlike GAAP, IFRS or International Financial Reporting Standards are principal-based. This means that when business transactions occur, GAAP must follow a certain progression of steps to record it. While IFRS can interpret the transaction in different ways. Another difference between principle-based IFRS and rule-based GAAP is that you cannot find a loophole up front as easily as you would a rule. Since the principles are more vague than a specific rule, it covers more potential threats to cheating reports. An example of this would be the historical cost used in GAAP versus the “true value” used by IFRS for fixed assets. Historical cost used the price paid for the asset, while “actual value” uses the estimated value of the asset today. The “real value” is extremely useful for companies that invest in something for their future financial gain.

Another one that American companies face is double bookkeeping work. To report and audit financial information, companies based in the United States must have GAPP, which is useful when comparing financial statements with other companies based in the US or internally within the company for management. However, for international reporting, and in more than 110 countries, International Financial Reporting Standards are used. (Bannister) Double accounting work is extensive too. An example would be that IFRS does not recognize LIFO as an acceptable inventory system. If the cost of a product increases, using LIFO saves the company money because a higher cost compared to gross income results in a lower taxable income. If a company using LIFO needs to report internationally now, any financial statements involving inventory would have to be reassessed to comply with IFRS. (Intuit team) This double counting causes an additional disadvantage in addition to doing more work for accountants in the United States as well.

Accountants who studied in the United States are taught how to comply with GAAP when they do financial reporting and the CPA exam certifies them to do so. However, they are not taught to meet IFRS principles, so they may not be preparing the best IFRS-compliant financial statements. This is bad for the company reporting the information because it may not be the best way to report that it could be for the company. It is also detrimental to all college accountants in the United States. In an increasingly globalized world economy, accountants who have been taught to satisfy the accounting rules of a single country are less valuable than an accountant who can satisfy the accounting principles in more than 100 countries.