August 5th, 2011 : The GAAP And IFRS - How These Terms Affect Your Accounting


The GAAP And IFRS - How These Terms Affect Your Accounting

Posted in Los Angeles Financial News by Admin

The GAAP And IFRS - How These Terms Affect Your Accounting

The GAAP And IFRS - How These Terms Affect Your Accounting

GAAP and IFRS - what do these terms mean? Why are they important for American businesses? And what changes do they hold for the future? These are standards that put all accounting firms on the same page. Let’s take a look at exactly what they mean and how they affect you.

These are two different ways of accounting. The United States uses GAAP, or Generally Accepted Accounting Principles. Much of the rest of the world uses IFRS, or International Financial Reporting Standards. The latest development is that there is a push for the U.S. to switch over to the international methods for accounting. This could cause some trouble for American businesses.

Why Should the U.S. Switch?

The idea behind all of this is to come up with a means of accounting that encourages global accounting, valuation, and investing in businesses. Basically, it's to try to place everyone on the same page. Over 100 countries use IFRS, and it is considered the most widely accepted standard for accounting.

What's The Difference?

One of the major differences is how businesses value their assets. In the U.S., assets are valued at their cost. This is called the cost principle. Under the international system, assets are valued based on their fair market value, or what they would sell for in the market place.

Consider buying land, for example. If a piece of land were purchased 30 years ago at $10,000, then that's the value it would show on the books. However, that land may be worth much more today.

The United States has been practicing valuing assets at cost for many years now. The problem is that not all businesses can make the switch at the same time. This means there may be growing pains during the time when companies are required to switch over. Critics of the "fair market value" method of valuing assets say there is too much room for opinion when it comes to judging the value of assets.

Will the U.S. Switch Over?

The Securities and Exchange Commission (SEC) is the government body pushing for the switch. The tentative goal is to have American operating from the new system around 2016. Furthermore, businesses and accountants will have to relearn many of their current accounting systems. In particular, information technology systems are expected to require a major overhaul. Likewise, accountants coming out of school may not be fully prepared to deal with the changeover. That is why it's expected to take a significant amount of time to fully change to the new system.

If you're a business owner or accounting firm, this is something you'll definitely have to deal with. It's predicted that the switch will definitely happen, and this will present a challenge to the entire US business community.

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