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IFRS and FASB - What are Financial Reporting Standards?

The Accounting Standards and Standard Setting Bodies

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The International Accounting Standards Board (IASB) issues international financial reporting standards (IFRS) to over 100 countries including the European Union. The United States is not included in this group but the differences between U.S. reporting standards and IFRS reporting standards is usually insignificant. FASB, the Financial Accounting Standards Board, is the primary body in the United States that sets accounting standards. However, the accounting standards of FASB and IFRS are about to converge. The U.S. will make the switch to IFRS to 2016.

Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles, generally called GAAP, are a set of rules and practices having substantial authoritative support. GAAP is the standards that companies use to compile their financial statements such as the income statement, balance sheet, and statement of cash flows.

Financial statements are compiled using GAAP primarily for the benefit of the financial markets and investors in the financial markets. Investors need to know the information they are looking at in different companies' annual reports is in some sort of standardized form. That is what GAAP is for. It makes sure that companies present the same information in the same format, while leaving room for managerial judgement.

GAAP is composed of many small rules, covering many types of accounting transactions, issued over a long period of time. FASB, the Financial Accounting Standards Board, issues new GAAP rules called Statements of the Financial Accounting Standards (SFAS). GAAP rules are quite powerful over business transactions and business firms. As such, FASB and the GAAP rules it issues are often a target of political pressure. A copy of the FASB Handbook with GAAP included is posted online.

There are several regulatory and standard-setting bodies that administer GAAP standards in consultation with the business community and professionals in accounting:

  1. Securities and Exchange Commission: This is the body that regulates the U.S. financial markets and accounting standard-setting bodies.

  2. Public Company Accounting Oversight Board: This body reviews auditing boards and determines auditing standards.

  3. Financial Accounting Standards Board: This board sets the accounting standards for firms in the U.S.

  4. International Accounting Standards Board: This board issues accounting standards for firms in many countries outside the U.S.

International Financial Reporting Standards (IFRS)

The U.S. accounting profession is about to undergo a major change as International Financial Reporting Standards are becoming increasingly accepted. The Securities and Exchange Commission (SEC) is looking at whether or not IFRS should be incorporated into U.S. accounting standards. Due to the globalization of the world economy, world leaders think that accounting standards across industrialized countries should be the same.

The Securities and Exchange Commission has decided, after years of negotiation, to let FASB and IASB converge. In 2002, the Norwalk agreement was reached. This agreement, which was a Memorandum of Understanding, essentially made a step toward formalizing the convergence of international and U.S. accounting standards with final convergence in 2016. This will make it easier for U.S. investors to compare foreign and U.S. companies and for U.S. companies to raise capital in the international financial markets.

There are some key differences in FASB and IASB that concern some accountants and some companies. One is that the LIFO inventory accounting method is not allowed under IASB.

Financial Regulatory Bodies

One purpose of financial regulatory bodies is to provide transparency in the financial markets. Convergence of FASB and IASB will help provide transparency for companies in all countries that participate in the IASB accounting standards and, as a result, permit increasing economic growth. There should be more investment between countries which will foster economic prosperity.

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