IFRS Research Paper - IFRS

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IFRS Research Paper - IFRS Powered By Docstoc
Advanced Accounting

Brandon Cousins

       In this document, I will discuss the future of the accounting profession as it relates to

the convergence of IFRS. The acronym IFRS is the abbreviation for International Financial

Reporting Standards, a set of accounting standards developed by the International Accounting

Standards Board, which is today evolving into the global standard for the preparation of public

company financial statements (5). In the upcoming paragraphs, I will briefly discuss the

evolution and history of IFRS, key differences between U.S. Generally Accepted Accounting

Principles (GAAP) and IFRS, differences in accounting terminology, and my own personal

opinions regarding IFRS and private companies in the U.S., implementation and effect of IFRS,

and other interesting facts and opinions pertaining to IFRS.

Evolution And History Of International Financial Reporting Standards (IFRS)

       The history and development for international standards for the accounting profession

date back to the late 1960’s. However, they have never been so highly sought after and needed

than today as we move closer to a global convergence as a result of our growing global

economy. In the year 1966, the proposal to establish an international study group comprising of

the Institute of Chartered Accountants of England & Wales (ICAEW), American Institute of

Certified Public Accountants (AICPA), and Canadian Institute of Chartered Accountants started

the process of discussion relating to international accounting standards. As a result of this

proposal, the foundation of the Accountants International Study Group (AISG) was formed and

they began to publish papers on several important topics, and as a result, their papers ignited a

need for change. These papers lead the way for standards that were to follow in the future, and

in the year 1973, an agreement was reached to establish an international body responsible for
writing accounting standards for use by the international accounting community. This body

came into existence not long after the agreement to establish a representative group, and the

body was known as the International Accounting Standards Committee (IASC); however, after

27 years of functioning, the organization was restructured and replaced by the International

Accounting Standards Board (IASB). In May of 2002, the IASB issued a press release announcing

the publication of the “Preface to International Financial Reporting Standards,” and thus, IFRS

formally came into existence. At the time, Sir David Tweedie, IASB Chairman, stated that the

preface provided "a brief description of the purpose and function of the main structures of the

new arrangements for setting global standards”. Additionally, he also stated that this would be

the context for which the Board would frame its standards (3). To date, much work is still being

done to prepare IFRS for official implementation.

Key Differences Between U.S. GAAP & IFRS

       There are some key differences between U.S. GAAP and IFRS. However, I have

discovered that there are more similarities between the two rather than differences. The

differences explained below are of more significance and are more relevant since they are

current. One of the most significant differences is that International Financial Reporting

Standards (IFRS) is based on principle, unlike U.S. Generally Accepted Accounting Principles

(GAAP), which is based more on rules. One particular item of interest to me was the accounting

for inventory. Under U.S. GAAP, accounting for inventory allowable cost methods includes FIFO

(First in-First Out), Average Cost, and LIFO (Last In-First Out). However, IFRS does not permit the

use of LIFO costing as an accounting for inventory cost method. Also, some differences exist

with regard to the statement of income. With U.S. GAAP, there is no requirement for income

statement captions. On the contrary, IFRS prescribes a minimum amount of captions on the

income statement (2). It should also be noted that there is a slight difference pertaining to

expenses and how they are recognized and in the amount that should be recognized (1). Also, a

key difference in balance sheet presentation exists. The classified balance sheet is not a

requirement of IFRS; however, under U.S. GAAP, a classified balance sheet is required unless

liquidity ordering is more practical and meaningful. Also, IFRS allows consolidation based on the

power exercised by the company on the financial and operational policies of the other entity

(2). Another difference to exist between U.S. GAAP and IFRS deals with respect to financial

liabilities and equity. Instruments that had been fully regarded as equity by U.S. GAAP will most

likely be considered as debt under the new IFRS standards. The list of differences seems

endless. In addition, I have found through my research that IFRS does not seem to have as

many complex rules to financial reporting as does U.S. GAAP. However, only time will be able to

tell the similarities and differences between these two systems.

Accounting Terminology

       In order to fully understand IFRS, I will briefly redefine the definition of IFRS. As stated

previously in this document, International Financial Reporting Standards (IFRS) is a set of

accounting standards, developed by the International Accounting Standards Board. To even

further clarify, the International Accounting Standards Board (IASB) is the governing body which

sets standards and discusses implementation of those standards for the International Financial

Reporting Standards. One thing is known for certain. Convergence of U.S. GAAP and IFRS is

quickly accelerating. Robert Herz, chairman of the U.S. Financial Accounting Standards Board

(FASB), recently reported that the organizations were aiming for convergence by a timeline of

2011 or 2012 (5). I imagine this is something we can all expect to see in the near future.

IFRS – For Private Companies In The United States?

       According to my research, private companies will have a new option in accounting

standards which will consist of a simplified, vastly slimmed-down version of International

Financial Reporting Standards. The full version of IFRS, which is approximately 2,500 pages long,

is a tenth of the size of U.S. GAAP. However, it will be interesting to see how many companies

will attempt to resist the new “IFRS for SMEs,” since it is only a 230 page document. SAE is an

acronym, widely used outside of the United States, for small and medium sized entities.

However, the International Accounting Standards Board (IASB) has no formal definition of what

size actually constitutes as an SME; rather, this smaller version of IFRS standards is mostly

reserved for companies that have no public accountability. To provide further clarification,

companies that publicly trade equity or debt, or those that hold assets as a fiduciary for a broad

group of outsiders as one of their primary businesses, as is common for banks, insurance

companies, and securities brokers and dealers, will not have the privilege of using the

condensed 230 page version of the IFRS standards. According to the IASB, it is estimated that

95% of the companies in the world are considered SMEs, which aids in the adoption of this

condensed version for PMEs to become widespread. Additionally, private companies are now

permitted in using the abbreviated standards; however, there is concern that the vast majority

of primary users of financial statements may not be fully educated in it, creating a situation in

which these users may not be fully capable of correctly analyzing these statements. On a side

note, the Institute of Management Accountants and Financial Executives International have

suggested that private companies strongly consider switching to the new simplified standard


Personal Feelings And Opinions Regarding IFRS & Conclusion

        Prior to doing my research and compiling this document, I had never even heard of

International Financial Reporting Standards, yet even begin to understand the concept behind

it. But after conducting my research, I can confidently state that I have both likes and dislikes

regarding IFRS as it relates to the accounting profession. I will begin by discussing my dislikes

first. The primary reason that I am hesitant towards IFRS is because I have spent my entire

formal education as an accounting student learning U.S. GAAP. Some anxiety sets in when I

think about the possibility of learning an entire new thought process of accounting procedure,

although I now know that the change is not as cumbersome as I originally thought. Secondly, I

am concerned with whether or not these new materials will be included in the CPA exam, and

also whether or not the CPA designation will hold as much clout. However, there are some

things to IFRS that I do like. First, the fact that one set of standards will exist for all to follow

makes accounting procedure more stable, allowing for comparability across countries and

businesses. Additionally, since IFRS is roughly a tenth of the size of U.S. GAAP, I would much

rather research a document of 2500 pages than research U.S. GAAP which is much larger in

content. In conclusion, I feel confident with the almost inevitable worldwide convergence of

IFRS in the accounting profession. It will take time to truly appreciate and understand this new

set of standards that will seemingly change the face of accounting as we know it.

                                         Works Cited

1. "Difference Between GAAP and IFRS | Difference Between." Difference Between |

   Difference Between Similar Terms and Objects. Web. 01 Apr. 2010.


2. "IFRS GAAP | International Financial Reporting Standards | Accounting, Accountant | Barry

   Epstein, Ph.D., CPA, Author, Expert." IFRS International Financial Reporting Standards. Web.

   01 Apr. 2010. <>.

3. "Knowledge Guide to IAS & IFRS | Accounting Standards | Library | ICAEW." Institute of

   Chartered Accountants in England and Wales Home Page| ICAEW. Web. 01 Apr. 2010.



4. "Private Companies Get IFRS Made Easy - Accounting -" - News and

   Insight for Financial Executives. Web. 01 Apr. 2010.


5. "What Is Ifrs and Why Are Global Economics Looking at One Accounting Standard?" Free

   Articles Directory | Submit Articles - Web. 01 Apr. 2010.