Globalization of Laws: United States Needs to Adopt a Version of I.F.R.S.

In the world of accounting there are sets of standards that accountants need to follow when publishing information for companies. In the United States, it is required for companies to follow U.S. Generally Applied Accounting Principles, also known as U.S. GAAP. Outside of the United States in other countries and markets, accountants are required to follow International Financial Reporting Standards, also known as IFRS, for when they report on their company. Due to globalization, these two sets of laws or standards are beginning to clash more obviously because the global markets include companies from all different parts of the world. The differences in these two sets of standards is becoming more obvious and causing some problems. Due to the globalization of the economy, the United States needs to conform to using the International Financial Reporting Standards in order for financial reporting to run more smoothly internationally. The IFRS standards are issued by the IASB (International Accounting Standards Board), while U.S. GAAP is issued by the FASB (Financial Accounting Standards Board, which is American based). The IFRS is used internationally and is adopted in over one hundred countries. The IFRS makes up everywhere outside the United States essentially. U.S. GAAP is used in the United States and is also required for any subsidiaries located in another country but owned by a United States Company. The International Financial Reporting Standards differ from U.S. Generally Applied Accounting Principles in a few ways. The IFRS does not permit the use of the last in, first out method. Also, IFRS uses a single-step method for impairment write-downs rather than the two-step method used in U.S. GAAP. These are just some of the ways the two standards differ. “Perhaps the greatest difference between IFRS and U.S. GAAP is that IFRS provides much less overall detail. As an example, IFRS fit into one book, about two inches thick while the three FASB paperbacks of pronouncements measure about nine thick, and that doesn’t include all of the authoritative literature” (IFRS, 2014). The IFRS literature is less complicated and less detailed than U.S. GAAP. Here, there is not an argument. The FASB has even noted this about their standards. Also, the IASB acknowledges that the IFRS is less extensive than U.S. GAAP. IFRS tends to be more based on principles but allows for application to be determined by managers. There are three key differences between U.S. GAAP and IFRS according to Gerard Zack.
“IFRS has generally provided for greater use of fair value accounting than U.S. GAAP, which has relied more on historical cost” (Zack, 2009). “The IFRS approach to accounting standards tends to be much more principles-based, providing broad concepts that should be followed, but leaving the application of those concepts in the hands of management and auditors. U.S. GAAP, by contrast, tends to be much more detailed in its guidance” (Zack, 2009). “Even in areas in which U.S. GAAP and IFRS share the basic accounting principle in relation to a particular topic, the application of each can be very different” (Zack, 2009).

These are the three main differences noted between IFRS and U.S. GAAP. Fair value accounting has to deal with accounting for assets that a company has acquired or owns and accounting for it at its “fair value” or price as of the current date. The difference between fair value accounting and historical cost is that it allows companies to record these assets at a new value depending on how much it is worth in the market compared to just having it recorded at the purchase price they paid for it years ago. U.S. GAAP is more focused on historical cost accounting. The fine details of fair value write-ups or write-downs only permit companies to write an asset up depending on a market valuation of the asset. When a company writes down the asset it is shown as