IFRS and FASB - What are Financial Reporting Standards?
The Accounting Standards and Standard Setting Bodies
The IASB, or International Accounting Standards Board, issues international financial reporting standards (IFRS) for public-interest entities. Most countries mandate IFRS standards for financial statements. The US is one of the remaining capital markets without an IFRS mandate, and there are no current plans to change. Japan, India and China plan to adopt these standards.
FASB, the Financial Accounting Standards Board, is the primary body in the United States that sets accounting standards and they have issued the GAAP, or Generally Accepted Accounting Principles. Given that we exist in a global marketplace, it is increasingly important for US multi-national companies and investors to be financially "bi-lingual" and versed in both the IFRS and GAAP.
Generally Accepted Accounting Principles (GAAP)
Generally Accepted Accounting Principles, generally called GAAP, are a set of rules and practices having substantial authoritative support. GAAP is the standards that companies use to compile their financial statements such as the income statement, balance sheet, and statement of cash flows.
Financial statements are compiled using GAAP primarily for the benefit of the financial markets and investors in the financial markets. Investors need to know the information they are looking at in different companies' annual reports is in some sort of standardized form. That is what GAAP is for. It makes sure that companies present the same information in the same format while leaving room for managerial judgment.
Financial Accounting Standards Board (FASB)
GAAP is composed of many small rules, covering many types of accounting transactions, issued over a long period of time. FASB, the Financial Accounting Standards Board, issues new GAAP rules called Statements of the Financial Accounting Standards (SFAS). GAAP rules are quite powerful over business transactions and business firms. As such, FASB and the GAAP rules it issues are often a target of political pressure. A copy of the FASB Handbook with GAAP included is posted online.
There are several regulatory and standard-setting bodies that administer GAAP standards in consultation with the business community and professionals in accounting:
- Securities and Exchange Commission: This is the body that regulates the U.S. financial markets and accounting standard-setting bodies.
- Public Company Accounting Oversight Board: This body reviews auditing boards and determines auditing standards.
- Financial Accounting Standards Board: This board sets the accounting standards for firms in the U.S.
- International Accounting Standards Board: This board issues accounting standards for firms in many countries outside the U.S.
International Financial Reporting Standards (IFRS)
While Securities and Exchange Commission (SEC) considers and debates, the US has not adopted IFRS, despite globalization of the world economy and the support of most world leaders to standardize accounting practices across industrialized nations. Some of the reasons cited are the position that GAAP is a superior standard and the cost and complexity of conversion. Many scholars, executives and business leaders believe that convergence is inevitable, however, there appear to be 4 roadblocks:
- Achieving a uniform set of international accounting standards, or "convergence," will mean synthesizing differing cultural, legal, regulatory, and economic priorities among nations, which is no small challenge.
- Countries have not agreed on a common regulator to enforce IFRS worldwide.
- The SEC has not prioritized authorizing IFRS.
- Significant differences between certain IFRS and U.S. GAAP rules, such as the LIFO inventory accounting method which is not allowed under IFRS, may fail to be resolved by the IASB, the FASB, and national governments.
Financial Regulatory Bodies
One purpose of financial regulatory bodies is to provide transparency in the financial markets. Convergence of FASB and IASB will help provide transparency for companies in all countries that participate in the IASB accounting standards and, as a result, permit increasing economic growth. There should be more investment between countries which will foster economic prosperity.