The EU wins this rule-set round
Tuesday, September 30, 2008 at 2:40AM OPINION: "Closing the Information GAAP," by L. Gordon Crovitz, Wall Street Journal, 8 September 2008, p. A17.
Generally Accepted Accounting Principles (GAAP) has been the de facto Western/emerging global standard for a long time. But now our SEC says the U.S. will transition to Europe's (actually London-driven) International Financial Reporting Standards (IFRS), which is described—despite the oxymoronic names—as actually constituting a shift from tighter rule to more flexible standards.
Might seem like a step backwards, but it isn't. Really reflecting the attempt to homogenize a global rule set that now covers a far wider amount of national variance—a sign of these frontier-integrating times.
So we bow to the Core's new winner on this all-important rule set, befitting Europe's emergence as a sort of rule-set superpower all its own.
Why does IFRS win?
Simple, according to the experts IFRS captures the underlying economics more accurately than GAAP does—survival of the fittest rule set in globalization.
Reader Comments (1)
Here's an area that IFRS does not capture the underlying economics: leases. When a company leases an asset, it has a legal right to use an economic resource and it incurs an obligation to make many future payments.
U.S. companies don't like to record an asset and a liability, makes ratios look bad because of the increase in liabilities. Under GAAP, it is possible for a leased asset to appear on a balance sheet, if 90% of the assets value is being paid for. I wish FASB would lower this to about 20%. Under IFRS, it takes paying for a full 100% of the asset's economic value.
Businesses love being to avoid reporting leases on the balance sheet, so are clammoring to use IFRS because they are so user friendly and make it easier to manipulate the numbers. IFRS actually make it easier for companies to avoid reporting the economcs of various transactions.