Generally Accepted Accounting Principles Generally accepted accounting principles (GAAP) have been described as the standard financial accounting standards applied at a given jurisdiction. They normally constitute the conventions, rules and standards that accountants observe while summarizing, preparation and recording of financial statements. Organizations, individuals, and businesses prepare financial statements. The financial statement shows the assets, liabilities, expenditure, gross profits and losses. After their preparation, financial statements give information on the entity’s financial position after experiencing changes during the financial year (Wiley 45). A company can be able to make informed financial decisions basing on the financial statement prepared. Such statements make work easier for governments’ tax authorities as the profit, which they ought to tax, is clearly indicated. This reduces the time they can spend trying to calculate the taxable profits of each business entity operating in the country. Most countries however have ditched the GAAP system to the International Financial Reporting Standards (IFRS) accounting system. The International Accounting Standards Board established the IFRS systems and hence it has the mandate of its maintenance. One of the countries that quickly adopted the IFRS accounting system is Australia and the first financial statement prepared observing the IFRS system was in June 30, 2006. Another notable nation that does not use the GAAP system is Russia whose process of shifting has been long. The country started the process of shifting to using IFRS in 1998 and only became successful in the early 2012. The IFRS has numerous advantages, which are the main reasons why these countries decided to use them. Companies in these countries can be easily compared amongst themselves as they apply the same standards in preparing their financial statements. This is particularly used when comparing companies in different countries who use the same standards. Investors are mostly concerned about the comparing results as they try to ponder the most profitable country to go and start a business in. since most countries use the IFRS system, the comparability is easy and done in a wide scale attracting many investors (Holt, et al 54) . The flexibility of the IFRS system compared to that of the GAAP might have been another reason why these countries decided to ditch the latter. Countries prefer a system whose approach is principle-based rather than rules-based philosophy applied in GAAD. The principle-based philosophy state provides that each set standard can be numerously used to arrive at a reasonable valuation. This makes it possible for enterprises to use easily the IFRS in different conflicting situations generating easy to read and comprehend statements. The use of the IFRS system attracts more investors into the country. The stock market has increased more change in ownership for the IFRS adopter’s shares. These kinds of shares have been in recent years the most traded in the liquid markets (Chalmers, et al 35). The need to harmonize financial statement preparation can be termed as the main reason why the two countries do not use the GAAP. More responsibility is bestowed on companies and since there are no strict accounting laws to be followed by such companies, cases of reporting mistakes are high that eventually lead to legal conflicts. These conflicts discourage foreign investments as investors are discouraged by such court battles. Investors greatly lead to the development of a country as they create employment. To avoid such negative image about their countries’ industries, Australia and Russia, to name a few have decided to ditch the GAAP system to the international IFRS basing on the advantages. Work CitedBragg, Steven M. Wiley Gaap 2012: Interpretation and Application of Generally Accepted Accounting Principles. Hoboken, NJ: John Wiley amp. Sons, 2011. Internet resource.Chalmers, Keryn, and Jayne M. Godfrey. Globalisation of Accounting Standards. Cheltenham [u.a.: Elgar, 2007. Print.Holt, Graham, David Tweedie, Philippe Richard, Abbas A. Mirza, and Magnus Orrell. International Financial Reporting Standards (ifrs) Workbook and Guide: Practical Insights, Case Studies, Multiple-Choice Questions, Illustrations. Hoboken, N.J: Wiley, 2013. Internet resource.
Generally Accepted Accounting Principles