Given the fact that both the US GAAP and IFRS frameworks are considering similar accounting and reporting issues, we might ask why we have two different versions which are largely covering the same broad areas.
Building a consolidated framework that covers everything has often been overlooked. The answer is, in part, a historical one. There have always been separate frameworks in existence and, until recently, the idea of developing one broad international framework that covers everything had not been very high up the agenda.
In recent decades, it has moved up the agenda – partly because of the increased globalisation of the world economy and partly because there are now a number of major multinational businesses which report in either US GAAP, IFRS or, in some cases, both. For the latter in particular, it is expensive and also potentially confusing to have to be bilingual in terms of financial reporting and, therefore, it makes sense to minimise the differences between the two frameworks or ideally to get rid of those differences altogether.
That, however, is not as easy as it sounds. There are fundamentally different philosophies which underpin the two frameworks. It has been said that US GAAP is largely driven by rules, whereas IFRS is underpinned more by principles. This means that, on occasion, US GAAP is more prescriptive than IFRS and there is less room for different accounting policies to be used. It would probably also be true to say that different mentalities may have been developed in the US than in other countries using IFRS. In addition, US GAAP's close linkages with the SEC add an extra dimension to the equation.
Efforts for alignment
That is not to say that there have not been efforts to align the two frameworks more closely. Prior to 2007, companies who reported using IFRS and who were subject to SEC regulation were required to include a reconciliation to US GAAP in their financial statements – although this was subsequently rescinded. After this, projects formed to develop new standards jointly, and there are two good fairly recent examples of this taking place.
ASC 606, Revenue from Contracts with Customers, has a number of similarities with (though is not identical in every respect) to IFRS 15. Equally ASC 842 on leases largely, though not completely, mirrors IFRS 16.
New standards were developed concurrently by the FASB and the IASB on Revenue from Contracts with Customers and Leasing respectively. Although the two standards are not identical in every respect, there are certainly significant correlations between the two. However, efforts to converge US GAAP and IFRS are by no means complete, and the energy which is devoted to achieving greater convergence is affected by changes in the political environment. There is, therefore, still some way to go before the two frameworks are the same, if that ever happens, which many would argue is unlikely.
This blog is an extract from Wayne Bartlett’s new course, US GAAP: A Guide for Non-US GAAP Users.