Since 2002, the Financial Accounting Standards Board and the International Accounting Standards Board have been working to converge U.S. generally accepted accounting principles and international financial reporting standards. As expected, the project has sparked controversies — particularly in the United States, where many preparers believe U.S. GAAP is the gold standard of accounting rules and should remain intact.
But the international rules have steadily gained U.S. support. In 2007, the Securities and Exchange Commission allowed private foreign issuers to report their results under IFRS without reconciling them to U.S. GAAP. A year later, the American Institute of Certified Public Accountants recognized the IASB as a standard-setter, which in effect allowed U.S. auditors to express opinions on financial statements prepared using IFRS. Meanwhile, at least 120 countries have signed up to replace their local GAAPs with some version of IFRS, and the SEC is contemplating doing the same in the United States.
Still, despite the increasing acceptance of the international rules, particularly among large organizations, misconceptions about them persist. Here, accounting experts debunk seven of the most common ones.
Myth No. 1: IFRS is a principles-based set of standards, while U.S. GAAP is rules based.
Critics routinely draw this faulty distinction, then make things worse by arguing about which mischaracterization is better, says Bruce Pounder, president of consultancy Leveraged Logic. In his book The Convergence Guidebook, Pounder points out that U.S. GAAP is also a principles-based set of standards. But because it is older, it has simply accumulated more guidance — rules — over the years. (The IASB sustains the myth when it touts the brevity of the 2,500 page IFRS rulebook versus GAAP’s 12,000 pages.)
Myth No. 2: U.S. GAAP is more rigorous than IFRS.
Not always, according to D.J. Gannon, a partner with Deloitte. He says that the nature of the discussions his firm has with clients has changed since IFRS entered the mix. Those discussions now focus on what a company is trying to accomplish with its accounting treatment, rather than address arcane paragraphs buried in the literature. “The rigor is there,” says Gannon.
Gannon believes that the branding of IFRS as less rigorous than U.S. GAAP is likely driven by typical change-management complaints, which see old methods as being superior to new ones. The international rules are more general and less prescriptive, and require more judgment — and “no one feels comfortable with that,” he says.
A recent study led by a researcher from the University of Massachusetts also undercuts the notion of GAAP’s superior rigor. The study, “Principles-Based Versus Rules-Based Accounting Standards,” concludes that “CFOs are less likely to report aggressively under a less precise (more principles-based) standard” than under a more rules-based standard.
Myth No. 3: IFRS can be easily manipulated by management.
Critics of international standards “make a big deal” about the amount of judgment required for some accounting decisions, says Pounder. For instance, companies can choose whether they carry property, plant, and equipment at historical cost (less depreciation) or at fair value under IFRS. Such choices seem to support the common belief that the international rules are so lax that managers “can do pretty much anything they want” under them, he says.