NCPA - National Center for Policy Analysis

A BETTER WAY TO KEEP THE BOOKS

September 15, 2008

The Securities & Exchange Commission (SEC) wants to dump the country's complex accounting rules in favor of a simpler set of international principles, the International Financial Reporting Standards (IFRS).  It's a major step toward a single worldwide standard -- a necessity for creating seamless global markets.  But adopting the model, which is relatively new and untested, has its own pitfalls, says BusinessWeek.

Junking the U.S. golden standard, the generally accepted accounting principles (GAAP), would have seemed preposterous a decade, but as more European and Asian companies roll out results in the American style as well as their own, it seems GAAP would be the top choice among the global marketplace, adds BusinessWeek:

  • According to accounting firm PricewaterhouseCoopers, the U.S. principles span 25,000 pages, compared with 2,500 pages of the IFRS; navigating the current principles is costly and confusing.
  • Assuming certain improvements are made to the international standards, U.S. public companies would switch over by 2016.
  • The change, which some large outfits could make as early as 2010, would create a common accounting regime, ideally allowing investors to compare a Silicon Valley technology company with one in Germany or Japan.
  • Companies also could better analyze cross-border acquisition opportunities, and it would be a boon for accounting firms, which will guide companies through the new system.

But even if companies are speaking the same language, their financial stories may be different for each other, because compared with GAAP's detailed requirements, the international principles tend to be broad, giving companies wiggle room.  In the end, that can lead to wide variances in profit reporting. 

Moreover, enforcement and cultural interpretations of the international rules can vary by country.  An estimated 29 countries that use IFRS have added their own exceptions to the rules, defeating the purpose of a global standard, says BusinessWeek.

Source: David Henry, "Global Accounting Rules: Simpler, Yes.  But Better?" BusinessWeek, September 15, 2008.

 

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