Blog Article

U.S. GAAP, why learn it?

Wednesday 8 June 2016


The opening decade of this century saw significant growth in the global use of International Financial Reporting Standards (IFRS). When the IASB was formed in 2001, only a small handful of countries followed IFRS for their financial reporting information. A recent study by the Trustees of the IFRS Foundation found that 116 out of 140 global jurisdictions" had fully adopted IFRS as their accounting standard. Of the remaining 24, 14 permit or require IFRS for at least some domestic public companies and two are in the process of moving to IFRS.

With all of this growth and expansion of IFRS, one could reasonably ask why there would be any use in learning any other set of accounting standards other than IFRS. It so happens that one of the remaining 8 holdouts is the United States and their continued reliance on U.S. GAAP (Generally Accepted Accounting Principles) as set forth by the Financial Accounting Standards Board (FASB) under the direction of the Securities and Exchange Commission (SEC). While it is true that the number of U.S. based publicly traded companies has seen significant decline over the past couple of decades, the remaining companies represent a significant amount of the investment capital in today's marketplace. These U.S. based companies also represent thousands of global subsidiaries who must also participate in the collection and compilation of accounting information that is consistent with their parent's accounting standards, U.S. GAAP.

Thus, accounting employees and management all around the world have a significant need to understand not only current U.S. GAAP, but also the future of the ever-changing landscape of the standards as set out by the FASB. Once upon a time, it appeared as though that future was fully connected with that of IFRS. In 2002, the FASB and the IASB signed the Norwalk Agreement signifying the desire and intention to gradually converge their standards into one global set of standards. Over the next decade, it became clear to those involved, just how difficult it would be to achieve that end result. In July 2012, the SEC issued a report wherein the conclusion was reached that adopting IFRS was simply not a feasible decision for the U.S. Recent comments by FASB Chairman Golden and SEC Chief Accountant James Schnurr seem to re-confirm the 2012 report.

'In the past six months, it has become increasingly clear that the United States is unlikely to adopt International Financial Reporting Standards, or offer U.S. public companies the option to use IFRS when they file their financial statements with the Securities and Exchange Commission." (Chairman Goldman, Q3 2015)

"…there is virtually no support to have the SEC mandate IFRS for all registrants." "There is little support for the SEC to provide an option allowing domestic companies to prepare their financial statements under IFRS." (James Schnurr, SEC Chief Accountant, Q2 2015)

Consistent with this approach, the FASB has turned their focus towards strengthening U.S. GAAP by introducing making long needed improvements and simplifications to the existing standards. From a low of 7 Accounting Standards Updates (ASUs) in 2012, the FASB issued 12 ASUs in 2013, 18 ASUs in 2014 (including the long-awaited ASU on Revenue Recognition), 17 ASUs in 2015, and already 12 ASUs through May of 2016.

Earlier this year, Chairman Goldman had this to say about the FASB's greatest challenge:

"I was asked what I consider to be the greatest challenge facing the FASB — and what I consider to be the FASB's greatest opportunity. My answer to both questions is the same. Our greatest challenge — and our greatest opportunity — is in setting the FASB's future agenda. As I've said in the past, a big part of successful standard setting is identifying the right problems. That requires determining if the problem can, in fact, be addressed with a standard setting solution." (Chairman Goldman, FASB Chairman, Q1 2016)

While some of the recent ASUs are minor in their overall impact, others will have far reaching implications for global subsidiaries using U.S. GAAP. Below is a brief highlight of some of the recent ASUs of importance:

ASU 2016-09 — Stock Compensation (Topic 718)

In an effort to reduce the cost and complexity of accounting for share-based payments and compensation, this ASU requires entities to record all excess tax benefits and tax deficiencies as an income tax benefit or expense in the income statement. Previously, excess tax benefits were recognized in additional paid-in capital (APIC pool). This standard eliminates the APIC pool. The standard also eliminates the requirement that excess tax benefits be separated from other income tax cash flows and will now be recognized in the operating section of the Statement of Cash Flows.

ASU 2016-02 — Leases (Topic 842)

The FASB's new lease accounting standard introduces a significant change in which lessees will recognize most leases on-balance sheet. This will increase their reported assets and liabilities, in some cases significantly. Lessor accounting remains substantially similar to current U.S. GAAP but with a small number of important changes.

ASU 2016-01 — Financial Instruments — Overall (Subtopic 825-10)

This accounting standard will significantly change the income statement impact of equity investments held by an entity, and the recognition of changes in fair value of financial liabilities when the fair value option is elected. All equity investments (other than equity method investments or investments in consolidated subsidiaries) will be measured at fair value and recognize changes in fair value in net income. Companies that elect the fair value option for financial liabilities must recognize changes in fair value due to instrument-specific credit risk in other comprehensive income (OCI).

ASU 2016-10 — Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing

ASU 2016-08 — Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations

ASU 2015-14 — Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date

ASU 2014-09 Revenue from Contracts with Customers (Topic 606)

Due to the complex implementation issues of ASU 2014-09 (Revenue from Contracts with Customers), the FASB has issued a few additional clarifications and improvements to the initial ASU. They also deferred the initial effective date back one year to annual fiscal periods beginning after December 15, 2017.

ASU 2015-11 — Inventory (Topic 330): Simplifying the Measurement of Inventory

Within the FASB's initiative to simplify U.S. GAAP where possible, this ASU changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value.

The clear conclusion is that U.S. GAAP is here to stay for the foreseeable future and will remain a significant player in the global accounting standards setting process. Therefore, it remains important, if not critical for managers and accounting professionals world-wide to be informed of and up-to-date with U.S. GAAP.

Kevin R. Smith, Ph.D.
Associate Professor of Accounting
Utah Valley University

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About the Author

Kevin R. Smith

Kevin R. Smith

Kevin R. Smith, Ph.D. is an Associate Professor of Accountancy in the Woodbury School of Business at Utah Valley University. Dr. Smith obtained his Ph.D. from the University of Arizona, and earned his Master of Accounting (MAcc) degree and Bachelor of Science in accounting degree from Brigham Young University. In addition to teaching at Utah Valley, Dr. Smith has taught accounting courses at the University of Kansas, the University of Arizona, and Brigham Young University. He has published multiple articles in academic, practitioner, and education journals, including the Journal of Business Finance & Accounting, the Chartered Accountants Journal, the Journal of Business and Accounting, Advances in Investment Analysis and Portfolio Management, and other journals.

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