Accounting Standards & Frameworks

Overview

• What you’ll learn: The major accounting standards (IFRS and GAAP), the standard-setting bodies (FASB and IASB), key differences between the frameworks, and the ongoing quest for global convergence.
• Prerequisites: Lesson 7 — Internal Controls & Ethics
• Estimated reading time: 15 minutes

Introduction

The Grand Historian records: Just as the ancient kingdoms each maintained their own systems of weights and measures — creating chaos at every border — so too have the nations of the modern world maintained their own accounting standards. The result is a Babel of financial reporting, where the same transaction may be recorded differently in New York, London, Tokyo, and Taipei.

Two great standards now dominate the financial world: US GAAP (Generally Accepted Accounting Principles), the law of the American financial empire, and IFRS (International Financial Reporting Standards), adopted by over 140 countries worldwide. Understanding both — and their differences — is essential for any accountant who operates beyond a single border.

What Are Accounting Standards?

Accounting standards are authoritative rules that dictate how transactions and events should be recognized, measured, presented, and disclosed in financial statements. They exist to ensure:

• Comparability: Investors can compare financial statements of different companies.
• Consistency: Companies apply the same methods from period to period.
• Transparency: Financial information is clear and understandable.
• Reliability: Users can trust that the numbers reflect economic reality.

US GAAP: The American Standard

US GAAP is set by the Financial Accounting Standards Board (FASB), a private-sector body established in 1973. The SEC has delegated the authority to establish accounting standards to the FASB, making its pronouncements effectively law for all US public companies.

Key Characteristics of GAAP

• Rules-based: Highly specific and detailed, with extensive guidance for specific industries and transactions.
• Codified: Organized in the Accounting Standards Codification (ASC), with topics numbered from ASC 105 to ASC 860.
• US-focused: Required for companies listed on US stock exchanges and filing with the SEC.
• Conservative: Generally prefers historical cost and has stricter rules about asset revaluation.

IFRS: The International Standard

IFRS is set by the International Accounting Standards Board (IASB), based in London. Over 140 countries require or permit IFRS for their listed companies, making it the most widely used set of accounting standards in the world.

Key Characteristics of IFRS

• Principles-based: Provides broad principles rather than detailed rules, relying on professional judgment.
• Flexible: Allows revaluation of certain assets to fair value.
• Global scope: Used in the EU, Australia, Canada, Japan (permitted), Taiwan (adopted), and most of Asia, Africa, and South America.
• Evolving: Continuously updated as the IASB issues new standards (IFRS 1 through IFRS 17 and counting).

Key Differences Between IFRS and GAAP

Other Important Standard-Setters

• GASB (Governmental Accounting Standards Board): Sets standards for US state and local governments.
• IPSASB (International Public Sector Accounting Standards Board): Sets standards for public sector entities internationally.
• AICPA: The American Institute of Certified Public Accountants provides guidance and ethics codes for the CPA profession.
• SEC: While not a standard-setter per se, the SEC has the ultimate authority over financial reporting for US public companies and can override FASB.

The Quest for Global Convergence

For decades, the FASB and IASB have worked toward converging GAAP and IFRS into a single global standard. Significant progress has been made — revenue recognition (ASC 606 / IFRS 15) and leases (ASC 842 / IFRS 16) were joint projects. However, full convergence remains elusive:

• The US has not adopted IFRS for domestic companies, despite considering it multiple times.
• Cultural, legal, and political differences across countries create resistance to a single standard.
• The rules-based vs. principles-based philosophical divide persists.

For the foreseeable future, accountants who work internationally must be fluent in both frameworks — a bilingual requirement in the language of business.

Key Takeaways

• US GAAP (set by FASB) is rules-based and used primarily in the United States.
• IFRS (set by IASB) is principles-based and used in over 140 countries worldwide.
• Key differences include inventory methods (LIFO), asset revaluation, development costs, and impairment reversal.
• Convergence efforts have produced aligned standards (revenue, leases) but full unification is unlikely soon.
• Accountants operating internationally must understand both frameworks.

What’s Next

Congratulations — you have completed Module 1: Accounting Foundations. You now possess the conceptual toolkit required to proceed to Module 2: Journal Entries & The Ledger, where you will apply these principles to record, post, adjust, and close real transactions.