International Financial Reporting Standards and US GAAP comparison

IFRS/U.S. GAAP Comparative Report

The GAAP (United States Generally Accepted Accounting Principles) and the IFRS (International Financial Reporting Standards) have similarities and differences that have to be carefully addressed in order to compare and contrast them. In 2002, the Norwalk Agreement made the similarities more solid and mitigated some of the differences but the two types of reporting are still not the same. The Norwalk Agreement was a memorandum between the U.S. And the International Accounting Standards Board (Financial, 2002). The understanding and agreement indicated that both sides wanted to see accounting standards that were compatible and that could be used domestically and with cross-border companies and investors (Financial, 2002).

By providing companies with compatible standards, there is a bigger opportunity to help investors decide what companies would be best for them to invest in. Mergers and acquisitions, along with other kinds of financial transactions, are generally easier to complete if accounting requirements are similar between the countries in which the merging or acquiring companies are based, as that causes fewer problems (AICPA, 2008; American, 2009).

In order to clearly realize the similarities and the differences between GAAP and IFRS, it is important to discuss the prominent issues that are seen between the two systems. That way, the reader can analyze where the problems are and consider how these issues affect the international finance field. Companies that want to do business with other companies across international lines have to be able to understand the way reporting is done (Ball, 2006; Spiceland, et al., 2009). In order to showcase that there will be two companies addressed here that will provide information about accounting from a GAAP and from an IFRS standpoint.

BAE Systems Profile/Analysis

BAE systems is a British company. It deals with security, aerospace, and defense, and is considered to be multinational (Sparaco & Morrocco, 1997). The headquarters of BAE are in London, but the company operates on a worldwide basis. When it comes to defense contractors, BAE is among the largest (Warwick, 2004). Based on the revenue it acquired in 2011, BAE was ranked third-largest when it came to defense contractors. It supplies the U.S. Department of Defense, as well as other organizations and companies, and is most active in the U.S. And the UK (Warwick, 2004). Because BAE is a UK company but sells the majority of its wares to the U.S. DOD, there can be some concerns about accounting systems and whether anything can be misinterpreted.

Many companies were around before BAE and were bought up by the company over time. These included Marconi and Vickers Shipbuilding (Spiegel, 2004). For the most part, the company was interested in buying up other British and foreign companies that used the same accounting system as was used by BAE, and that allowed the investors who were interested in these companies to understand just what they were getting or agreeing to. In short, this made mergers and acquisitions much faster because there were no questions about whether a company was providing the "right" sort of information for other companies to consider from a financial standpoint.

There are several major defense projects in which BAE is involved (Warwick, 2004). Everything from airplanes to submarines are very important for defense and they are part of the category of defense projects on which BAE is working. However, BAE is not without controversy. It has been the subject of various types of criticism, including those who oppose the arms trade. There have also been allegations of corrupt and unethical practices, but it does not appear that anything has been proven in regard to those practices. BAE is on the London Stock Exchange (Warwick, 2004). While the company is very strong, there are concerns with the European and U.S. economies that could affect BAE and its dealings in the defense field. It remains to be seen what kinds of changes BAE may need to make in order to be certain it can continue to be competitive in today's market.

Because BAE is so well established and has been in existence since 1999, the likelihood of it failing because of an economic downturn is extremely small. With production of both military and civil defense items, BAE has many choices for what it produces for other companies and countries (Warwick, 2004). The companies that merged to create BAE were both well established in the defense field before they consolidated, and that helped BAE to be strong from the beginning of its time instead of working to establish itself and catch up with companies that were already making gains in the aerospace and defense industries. That is part of why BAE remains so valuable today.

Lockheed Martin Profile/Analysis

Lockheed Martin is very similar to BAE in what it does, with the main difference being that it is an American company. This means that it is subject to GAAP accounting standards as opposed to IFRS rules. The company was founded in 1995 (Hartung, 2010). It came from other companies that merged and consolidated, however, because the aerospace and defense industries had been going strong in the United States for many years before that. Defense contractors were one of the strongest companies in the country beginning in the 1950s (Edwards, 1979). Lockheed Martin is headquartered in Maryland and does most of its business with the United States military (Hartung, 2010). While there are some civilian sales, they make up only about 26% of the total revenue of the company.

More than 123,000 people are employed by Lockheed Martin across the world (Hartung, 2010). There are four segments to business in which Lockheed Martin operates. These are space systems, electronic systems, information systems and global solutions, and aeronautics. The company was on the top of the list of U.S. federal contractors in both 2008 and 2009 (Hartung, 2010). Lockheed Martin is developing many different kinds of aerospace and defense equipment and has won many awards for that during its time in existence. It also lobbies with a political action committee in order to help advance its interests. The company is committed to providing great service and high quality products.

Because Lockheed Martin knows that lives can very easily depend on the equipment and products it creates, the company is careful to focus on product specifications and quality control. That extends to its accounting practices, where it follows GAAP requirements followed by all American companies (Hartung, 2010). The company has largely avoided any criticism of the way it handles it operations, mostly because of its management style. Employees are managed through comprehensive leadership programs using appropriate, current theories, which allows the company to continue to move forward and keep their management team and their employees on track (Hartung, 2010).

Several tiers of employees work in the company (Hartung, 2010). This helps sort out pay grades, security clearances, and other factors that have to be addressed when it comes to company dynamics. It also helps with the separation of tasks and departments, and ensures that people report to the proper management professionals (Hartung, 2010). By addressing these kinds of issues with the way the company is structured, many problems and concerns can be completely avoided. Another thing the structure does is to promote a high level of efficiency in the company, which is always seen as being valuable (Hartung, 2010).

Efficiency and quality are highly important for a company like Lockheed Martin, because the company spends so much of its time focused on military and defense contracts. Lives are at stake, but so is the livelihood of the company itself. If it fails to provide what is needed for the government, it could very well find itself blacklisted by the government. That would sharply reduce its business and could even cause it to have to close its doors. While this kind of a scenario would be unlikely, it would certainly not be impossible and could lead to a complete restructuring and shakeup of the U.S. defense industry.

Comparing the Requirements

In the U.S., the accounting standards include the requirement to provide financial information that is comparative (American, 2009). The reporting standards for the rest of the world - the IFRS - does not have that requirement but most of the companies that are part of that style of reporting realize that it is highly desirable for them to provide reports that can be used to make comparisons with others companies. That can allow investors to make determinations as to whether a company has financial strength, and it can also help investors to compare one company with another to see how they are performing as part of the same industry. Of course, not all companies in the same industry would be expected to be equal. There are size considerations and other issues of which to be aware.

With Lockheed Martin and BAE, however, a comparison would be helpful. In order to have that, both companies would have to subscribe to the same kind of accounting standards. Without an industry comparison it is too difficult for an investor to make a determination as to which of the businesses would be the right choice for any kind of financial investment. For example, there are many SEC registered companies, and they are not all American companies. Many of them are actually headquartered in foreign countries. In the past they had to change their accounting and financial information over to GAAP requirements, but changes are allowing companies to continue to use IFRS instead. Some of the U.S. based companies are also going to be allowed to use IFRS in order to help foreign investors better understand how they match up with competitors from other countries (AICPA, 2008). In the next few years, all companies (U.S. And otherwise) may be using IFRS (Bradshaw, et al., 2010).

When addressing the disclosure levels to which companies have to adhere, IFRS and GAAP are not so different. The differences generally come into play with the specifics of the issue, because there are certain documents in which specific information needs to be provided, and those documents can vary greatly between the two types of reporting standards (AICPA, 2008). Because the documents are different between the reporting types, the way the information is presented and even the way it is collected can vary. That means both of those issues would need to be addressed by any company that is going to move from the GAAP system to the IFRS system or vice versa. The current idea is to move all companies over to using the IFRS system, including companies that are based in the U.S. That will require U.S. companies to spend time learning how to use the IFRS system, which will require a degree of time and effort (AICPA, 2008). Currently, the IFRS system is more strongly principles based, while a more rules based approach is taken by the GAAP (Gucenme & Arsoy, 2005).

The GAAP has highly specific guidance in the way it is applied, and the IFRS is less specific, making its application more limited in some ways. Overall, the biggest difference that is seen between the GAAP and the IFRS is how strict the rules are (International, 2007; SEC, 2008). The GAAP requirements are very heavy on the rules that are set out for the companies that must report under it when it comes to their financial dealings and accounting. The IFRS is much less specific in its requirements, and the rules that it requires companies to follow are far more relaxed in nature. Whether this is good or bad obviously depends on which side of the issue one is on and what one is attempting to do with the information he or she hopes to acquire about a company's financial status.

It is important to clarify that the idea that the IFRS is less rules-based does not mean that it is an unacceptable method for international accounting standards or that it is lax. Instead, it only means that there are differences in the ways in which information can be, should be, and is provided. Moving to that system would mean changes in the strict way U.S. companies have to provide their accounting and financial information under the GAAP standards that they currently use. It would seem as though this would be a very welcome change, but that may not necessarily be the case for some companies. The lack of any real rigidity in the requirements provided by IFRS can complicate the providing of financial information for people who are used to handling the issue in a particular way. Creating the reports will take time, and what goes into them will also be more subjective.

Theories and Debates

Anytime that changes are made or changes are being discussed, there will be theories created and debates started as to what will be done and why it should (or should not) be done. There are many companies that want to see the changeover to IFRS standards, and nearly an equal number of companies that want to keep the GAAP standards they are used to (Crovitz, 2008). It is likely not going to be possible to see agreement between all companies as to what would be the best course of action. It is also possible that there could be a middle ground compromise made that would blend the two different reporting standards and allow all companies to have an adjustment period so that the change would not appear so jolting to them. It remains to be seen how the issue will actually be handled.

Right now, however, current discussion does not allow for a compromise. It is focused on a one-or-the-other approach in that either the GAAP standards or the IFRS will prevail (Spiceland, et al., 2009). With that being the case, there are strong debates about whether it is most valuable to simply change everything over to IFRS. What that change will do to the accounting profession depends on who is asked the question. The all-or-nothing style that is being provided currently, though, is not an overly promising option for what can be done to make the accounting standards more "standard" throughout the world. Comparing Lockheed Martin and BAE right now, for example, is very difficult because the information they are required to provide is different for each company. Without the same information presented in the same way, analysis of the issues they may face and how they truly compare financially to one another may be very difficult to determine.

On the positive side of things, there are a large number of U.S. companies that like the change. The lack of strictness in the rules will be a welcome change for many of these companies, since the IFRS requirements are much more similar to guidelines as opposed to actual rules. That ensures that each company could provide the right and requested information relatively easily. Not everyone is looking at this positively, however, because there are other theories that show a lot of concern with the IFRS and its lack of actual rules. The main concern is whether there will actually be enough information provided in order to allow investors to make good, informed choices about whether they should get involved with a company or not. Additionally, some wonder how companies will know whether they are getting what they need in the way of information when they want to acquire or merge with other companies. A lack of information could leave them at a serious financial disadvantage when they agree to a merger or acquisition of another company.

These issues have to be addressed, but there are not going to be any easily provided answers to the questions they pose. Some companies feel good about the IFRS regulations, and some companies feel bad about them. That is just the way things are, and they are not likely to change. As with nearly everything in life, there are many varied opinions as to the value of the change to IFRS requirements and how much of a benefit it is actually going to offer to the parties that will be involved with it. A complete consensus on the issue is not going to be realistic or possible, because opinions as to which set of regulations should be followed and which set is best will always vary.

In the meantime, the debate is going to continue as to whether IFRS or GAAP is the best choice. One side prefers IFRS, and one side prefers GAAP - and this is not completely divided based on whether a company is currently using one system or the other. There are also those who are lobbying for a middle ground approach, where the two accounting systems would be merged and the rule sets would be blended to provide something less strict than GAAP but more comprehensive and structured than IFRS (Crovitz, 2008; Gucenme & Arsoy, 2005). This theory is plausible, but the set of rules that would be created from the blend would be difficult to address and highly complicated to create. Naturally, that is not something to which most companies would willingly subscribe - especially when there are options that are much easier to deal with from the beginning and that would not require them to do nearly as much work as they currently do.

Because governing bodies are so busy, they also do not want to spend inordinate amounts of time going over and over rules and regulations and arguing about whether something is acceptable or should be changed. The majority of the world uses the IFRS standards, while GAAP is a U.S.-only creation. Because of that, it makes perfect sense that the U.S. would convert to IFRS instead of asking the rest of the world to convert to GAAP. Even though there are many U.S. companies that are not happy with the conversion idea and do not want to change, they are likely fighting a battle which they will lose. Most IFRS uses do not want to change, either, and there are a lot more of them because so many countries throughout the world use the IFRS standards instead of the GAAP regulations. While some may argue that the majority is not necessarily right, it is generally the majority that wins.

This can be expected to be seen with the IFRS vs. GAAP discussion, meaning that Lockheed Martin would need to convert to IFRS to be more in line with the reporting provided by BAE, instead of the other way around. The bottom line is that what the majority and the governments decide will be what takes place, regardless of how many debates are held and how many companies complain because they do not want to have the way they do things changed. The systems need to be meshed together to help the globalization that is taking place in the world, and because it is so complicated to blend the two different types of standards it makes much more sense to simply choose one over the other. This will, of course, have far reaching and lasting effects on the accounting industry that have to be taken into consideration before changes are made.

Effects on the Industry

Changing everything over from GAAP to IFRS will have a serious effect on financial services in the U.S., and on the accounting industry most specifically. There are two issues that are at the forefront of the change and that need to be addressed. First, it is important to consider whether the IFRS standards actually do provide a complete picture of what investors and others want and need to know about a company's financial health. Second, it is also vital to consider how much confusion will be created when an investor takes a look back at the past reports of a company to consider financial performance. Things will look very different from one year to the next whenever the changeover is made, and that could cause confusion and misunderstandings about the overall health of the company from a strictly financial standpoint. Doing that could hurt the potential for mergers and acquisitions that would otherwise be very beneficial to a number of companies.

Considerations for the Future

Companies like BAE and Lockheed Martin are relatively new companies, but that is in name only. The companies that merged to create them had been around for much longer, and part of the reason they merged was due to the fact that they were able to get good financial information that told them a merger would be in their best interest. By changing the accounting requirements from GAAP to IFRS, it is possible that some companies that may want to merge in the future will be unable to do so because they feel as though they cannot collect enough information to make their decision a safe one. By stopping mergers and acquisitions from taking place, commerce can be slowed and that can harm a country and the companies in it. In an increasingly global marketplace, this affects more than just a couple of companies and could have ripples that spread out in many directions.