IFRS versus GAAP: Assessing the Issue
Major sources of investment capital have long favored greater harmony and transparency in global accounting standards (Ohlgart & Ernst, 2011). While world accounting standards in the modern sense originated in the US, a divergence has occurred between GAAP criteria and the prevailing international accounting standards, currently represented by IFRS criteria. The latter are now in official use in 120 nations (Tyson, 2011, p. 27). In October 2002, FASB and IASB formalized the Norwalk Agreement, to converge in their accounting rules over time (Charron & Moores, 2011; Tyson, 2011). Since then, both the major accounting associations and government regulators have moved toward convergence in accounting practices. In light of this development, this paper will look at whether to recommend that the SEC maintain GAAP criteria for firms that report in the US or move to IFRS criteria, especially concerning the issue of intangible assets.
The Call for Convergence
After the Enron and WorldCom accounting fiascos, which “culminated in huge financial losses and decimated capital markets worldwide,” there has been vociferous pressure, especially from European firms and auditing agencies, for the US to join the growing world community of accounting practice by moving away from GAAP and toward IFRS criteria (Tyson, 2011, p. 25). This assumes that globally standardized criteria would have improved transparency in financial reporting at Enron and WorldCom, raising awareness of irregularities earlier. Thus, some have argued that IFRS standards, which rely on principles more than rules, foment more professional judgment, which creates transparency (Tyson, 2011, p. 30). Admittedly, GAAP criteria are better at industry-specific detail, but there have also been arguments that they may encourage “financial engineering” (Tyson, 2011, p. 27). Nevertheless, credible academic sources find no evidence that IFRS standards are superior to GAAP criteria (Tyson, 2011, p. 30)….