How Many Accounting Standards Do We Really Need?

Are you aware that two different sets of accounting standards exist around the world? American organizations follow Generally Accepted Accounting Principles (GAAP), whereas other organizations adhere to International Financial Reporting Standards (IFRS).

Although the two sets of standards share many similarities, they maintain several important differences as well. Nevertheless, one might guess that a single set of unified standards would represent a desirable goal, and that the existing two sets of standards would provide more than sufficient flexibility to satisfy every entity.

Is this your guess as well? Then perhaps you should guess again! Last week, the experts at the Financial Accounting Foundation who maintain GAAP announced that a third set of standards is now available. Small and medium sized entities can choose to follow a “non GAAP” set of standards that is much simpler than traditional GAAP.

On the one hand, it is difficult to take umbrage with the Foundation’s announcement. After all, traditional GAAP is regarded as a terribly complex accounting framework by even the largest and most sophisticated global organizations. It undoubtedly imposes an onerous regulatory burden on entrepreneurial groups.

And yet, wouldn’t it be preferable to simplify GAAP for all organizations, as opposed to developing alternative standards for various “non GAAP” organizations? Multiple sets of standards may cause inconsistency and thus confusion among financial statement users, thereby further complicating an already troublesome status quo.

Indeed, if the Financial Accounting Foundation continues to create customized “non GAAP” standards for various groups, its activities may result in chaos. So how many sets of accounting standards do we really need? The answer, perhaps, should be “as few as possible.”