Introduction

            American companies have been using the Generally Accepted Accounting Principles for financial reporting for so many years.  It still uses this but there are plans to change this come 2016, if a proposed standard financial reporting timetable will go through in the year 2011.  The American Security Exchange Commission has made proposal to change the American system of financial reporting to the international standards reporting system.

            Most American companies prepare financial, statement using the US, GAAP.  Among these very many companies, about 15,000 are registered with the SEC (Epstein and Jermakowicz, 2008).  SEC has made a move to change the accounting reporting system to the international standards, which is the International Financial Reporting Standards.  This is expected to take place if a decision is made in the year 2011 about the IFRS (Johnson and Leone, 2008).

            There has always been the effort to create worldwide financial reporting rules.  This received some positive response in the year 2005 when so many countries started using the International Financial Reporting Standards.  This included listed companies from Canada, South Africa, 25 countries from the European Union member states, Australia and other countries (Epstein and Jermakowicz, 2008).

Security and Exchange Commission

            The Security and Exchange Commission due to its aim to make financial reporting be in accordance with the international standards, has indicated that some companies may be able to start using these standards as early as 2009 (Jonson and Leone, 2008).  The Security and Exchange Commission proposed a timetable of transitioning public companies to IFRS from General Accepted Accounting Standards in August 2008, which  had some companies to begin using this system earlier that others in the eight year plan.  This plan has the section of decision making to be done in 2011,  to make a decision on whether all the 15, 000 companies registered under SEC should comply to the rules of International Financial Reporting Standards (Johnson and Leone, 2008).

            The plan is as follows; the small companies are to start using the International Financial Reporting Standards by the year 2016, the accelerated filers by 2015 and the large accelerated filers by 2014 (Johnson and Leone, 2008).

Generally Accepted Accounting Principles (GAAP)

            Companies in the United States of America use one system to prepare, present and report financial statements.  These financial statements are prepared in accordance with the GAAP.  GAAP are rules meant to guide American companies in financial report writing, presentation and preparation.  These are the financial rules that the Security and Exchange Commission chairman, would want the United States companies to forgo by the year 2016 with some of them already in the timetable to start using the IFRS by the year 2009 (Epstein and Jermakowicz, 2008).

            GAAP provides investors with accounting information so that they have a minimum consistency level that can be used to analyze companies to be able to make decisions  regarding investments.  The financial statement provides creditors too with accounting information so that they can make decision (Delaney et al, 2003).  There are four basic assumptions under which GAAP operates.  It assumes that the unit of record will always be a stable currency, this is in the monetary unit principle.  The nominal value of the US dollar is accepted by the FASB as the monetary unit which is unadjusted for inflation.  The second assumption is that, its entities will always be in operation indefinitely.  It is because of this that the methods ?f asset capitalization, amortization and depreciation are validated.  This assumption though is only applicable when liquidation is certain.  The third assumption is about the business entity and it assumes that the business and the owner, are two different entities therefore should not share any losses or profit.  The last assumption of the United State financial statement rules is that an enterprise’s economic activities can be divided into artificial time periods (Delaney et al, 2003).

The Principles of Generally Accepted Accounting Principles

            The GAAP has four principles under which companies are expected to record accounting information.  These are cost, disclosure, matching and revenue principles.  Cost principle requires companies to prepare accounts and reports based on the acquisition costs and not to consider reporting based on liabilities and assets’ fair market value.  Matching principle requires companies to match expenses with revenues under reasonable conditions.  The principle argues that expenses are not recognized out of work performance or product production, but when contribution is made by the work performed or the product that is produced (Delaney et al, 2003).

            Disclosure principle:  Under this principle trade off analysis should form the main basis of decision making because preparation and use of a large amount of information cost a lot.  The information provided should be able to help decision making or judgment while costs are kept reasonable.  Revenue principle is based on the accrual basis accounting that requires records on revenue to be made only when revenue is realized, or when are realizable.  It is not appropriate to record revenue when cash is received according to this GAAP principle.  Records are also made when revenue is earned (Delaney et al, 2003).  These are the basic principles that companies are required to follow when reporting financial data.  Generally Accepted Accounting Principles as has been shown covers share measurements, revenue recognition and classification of balance sheet items.

International Financial Reporting Standards

            The rules or standards of accounts information presentation and reporting has a  framework with objectives, features and components of the financial statements, different from the GAAP.  International Financial Reporting Standards framework indicate that the financial statements are prepared and reported to provide information about performance, financial position and any changes in the financial position of a company or entity, that is useful to so many users, for example the investors and creditors (Epstein and Jermakowicz, 2008).

            This international system of reporting has assumptions too just like the GAAP has.  The assumptions are based on the going concern and the accrual basis.  Accrual basis just like in the GAAP indicate that transactions effects are only recognized when they occur and not when money is received.  Going concern indicate that the preparation of financial statements is done on the basis that the company does not end operation for the foreseeable future (Epstein and Jermakowicz, 2008).

            This framework  has characteristics such as reliability, relevance, comparability and understandability (United Nations Conference on Trade & Development, 2007).  It is because of these features that when adopted by the United States companies, will benefit the country.  SEC indicates that if this system is not adopted in the country, based on the fact that most countries are now using the system and that most foreign investors are American citizens, there will be lack of transparency and comparability (Johnson and Leone, 2008).

            International Financial Reporting Standards sets out the balance sheet to have equity, liability, assets, expenses and income (Epstein and Jermakowicz, 2008).  It has the following contents in the financial statement.  An income statement, a balance sheet, a cash flow statement, accounting policies summary and changes of equity statement or a recognized income/expense statement.  The system provides comparative information for a past reporting period.

Changes in the IFRS to be Effective From 2009

            As the IFRS has developed over time through the several changes by IASB, the revision made by the IASB in 2007 September brought some changes too in the IFRS.  These changes are on the presentation of the final statements of the IAS 1.  They are;

The entity must show the other comprehensive income component taxes and disclose adjustments relating to them.

The entity must provide one or two statements with the information about non owner changes in equity.  If one form is used then it has to be a comprehensive income statement, while if the entity uses two forms, then they have to be an income statement and a comprehensive income statement.  It is not compulsory to present comprehensive income components in the changes in equity statement.

The changes also influenced the statement of financial position which has to be presented from the beginning of the earliest comparative period.  This is done when the entity retrospectively applies an accounting or makes a retrospective restatement , and is done in a complete set of financial statements (Epstein and Jermakowicz, 2008).

            The new IFRS that will be used from 2009 has the balance sheet changed to a statement of financial position, the cash flow statement changed to statement of cash flows, and income statement changed to statement of comprehensive income (Epstein and Jermakowicz, 2008).

Reviewed International Financial Reporting Standards is the new form of financial reporting that the SEC wants companies of the United States of America to use.

Effects on United States Accounting and the World

            There are various complains on the adoption of these standards, though the trend has been that most countries are opting for the IFRS, rather that their local GAAP.  United States is on the verge of adopting it and these are some of the complains that have arisen after a proposal was made by the SEC to do away with GAAP (Johnson and Leone, 2008).  People complain that United States accountants will have to undergo fresh training based on the change of filing system, which to them means more expenses on career building hence expensive and time consuming.  Company owners have raised complains that the time given for the start of the use of this kind of filing is too little and feel that more time is needed for it to be successfully adopted.              There have been positive anticipated effects though.  Johnson and Leone quote SEC’s chairman’s words in their article that most foreign companies are owned by United States of America citizens and therefore to adopt the use of international standards in the united States will encourage transparency and comparability (2008).  The problem of lack of confidence in most investors due to lack of uniformity in the financial reporting system will also be eliminated by using the global standards (United Nations Conference on Trade & Development, 2007).   Another change that accounting firms view as encouraging is the fact that global standards eliminate the reconciliation requirement of the GAAP (Johnson and Leone, 2008).

References

Delaney, P. R. Epstein, J. B., Nach, R. and Budak, S. W. (2004). Application of Generally Accepted Accounting Principles. US: Routledge.

Epstein, J. B. and Jermakowicz, K. E. (2008). Wiley IFRS 2008: Interpretation and Application of International Accounting and Financial Reporting Standards. Australia: John Wiley and Sons.

Epstein, J. B. and Jermakowicz, K. E. (2008). IFRS Policies and Procedures. Australia: John Wiley and Sons.

Sarah Johnson and Marie Leone. (2008). The End of GAAP Could Begin Next Year,  – CFO US Accounting Magazine. Retrieved on 14th October, 2008 from:

<<http://www.cfo.com/article.cfm/12001891>>.

United Nations Conference on Trade & Development. (2007). International Accounting and Reporting Issues: 2006 Review. United Nations Publications.