In the world of accounting, there are sets of rules that are followed to ensure that business runs smoothly and in an orderly manner. In the United States accounts follow a set of rules known as GAAP (Generally Accepted Accounting Principles). It is known as a rule-based system. However, a larger population of the world follows the accounting standard known as IFRS (International Financial Reporting Standards). Many countries follow this standard which is known to be more principle based. These countries use this method so that they can understand each other’s methods and identify what they are doing. Although GAAP and IFRS are not very different from each other, they do have some important differences.

Since IFRS is principle-based, it leaves a lot of room for different interpretations that could lead to financial statement disclosures that can greatly influence a company. GAAP’s rules-based principle keeps companies on track by having a clear list of rules that show them what they can and cannot report. This doesn’t allow companies to do as they please and keeps everyone on the same page. Another difference between the two companies is the use of LIFO (Last in First out). This is an inventory method which means that the last inventory brought into the business will be the first to be sold. GAAP allows companies to choose between this or FIFO (first in, first out). However, IFRS does not allow companies to use LIFO and they must opt ​​out of FIFO. When it comes to development costs, the standards differ again. GAAP always labels these costs as expenses. While IFRS has a criterion that if these costs coincide, they can be capitalized instead of being expensed. GAAP is a rules-based standard, if not it gives companies so many options. Once an asset is recorded at its market value, there is no going back on that amount, even if it changes in the future. However, IFRS says that if there is a change in the market value of the asset, they can reverse the amortization and change it to its new market value.

Although there are many differences between the two, why isn’t there a standard rule that is used all over the world? One reason is based on the two standards they both have. America thinks they should have a specific set of rules and if it breaks then they know they have to go to the auditors and accountants to find the problem. IFRS allow more freedom and prefer that they give companies more flexibility in how they go about their business. Another reason the two won’t merge is that IFRS likes to work on problems alone. They don’t reach out to others or work with them to fix what’s wrong. GAAP is the opposite, as they want others to come in and help if there is a problem they can’t solve. They have published standards and none of them coincide with what the IFRS believe. This goes on to show that they are different.

Finally, one of the main reasons the two won’t come together to become one is politics. Politics is a big problem in many areas and accounting does not avoid it. In the United States, giving up their set of GAAP rules to a third-party foreign policy they didn’t form doesn’t appeal to them. They believe that if they give up, they are not protecting investors in the country and leaving them responsible for future problems. GAAP members also think that with a standard that is more principle-based rather than rule-based, there is plenty of room for companies to do what they want. It’s uncomfortable for GAAP to have looser rules and let companies do as they please. They believe that there is a lot of room for problems that can arise from this. When asked why they don’t converge, they responded that investors believe that “giving up their high quality standards should not be compromised for the sake of uniformity (https://www.ifac.org/global-knowledge- gateway/business -reports/discussion/if-ifrs-has-a-future-us).” However, minor adjustments have been made to GAAP to somewhat bridge the gap between the two and they want to narrow the gap as much as possible without losing what they believe to be correct.

In conclusion, there are many differences between GAAP and IFRS. Both are configured to help companies correctly file information and conduct business efficiently while following standards. The differences between the two standards have narrowed, but there is still a larger gap between the two. It will be interesting to trace these two accounting standards and see if there will ever be a single set of standards.