Do you think the U.S. should convert its accounting standards from GAAP to IFRS and
why
Introduction
Yes the US should convert from the GAAP to IFRS. The adoption of the IFRS globally is
generally meant to ensure standard or uniform way of reporting accounting information that may
make comparison between companies easy. The IFRS have been developed by the International
Accounting Standards Board. The application of uniform reporting standards in accounting
would be cost effective and convenient. Companies that prefer to merge would find it easy to
estimate the liabilities and long term debts before making any commitments. The International
Financial Reporting Standards (IFRS) are standards that have been set by the International
Accounting Standards Board (IASB) and they are supposed to take effect globally. These
standards are supposed to guide Companies on the preparation of financial statements globally
and most countries in the world have already committed to adopting the IFRS. Large American
multinational companies that have foreign subsidiaries are currently using the IFRS (Journal of
Accountancy 3). The following are the reasons that the US should change to IFRS;
Adopting the IFRS ensures that a particular format is used throughout the world in financial
statements. American companies would also find it easier to compete internationally, raise
capital and also bid for foreign contracts. It’s notable that the European Union completed their
transition to IFRS in 2005 having started in 2002. The US can learn from the EU experience and
also correct the mistakes that the union experienced before finalizing the exercise (Jennings 1).
There are three major reasons why the US should convert to IFRS;
IFRS enhances effective comparison
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The IFRS assists international investors, other companies and the general public to make global
comparisons easily on financial statements. The IFRS will make it possible for the American
companies to prepare their own financial statements and present on the same accounting basis as
their competitors hence comparison on their performance would be easily compared. It would
very difficult to compare companies that have different financial statements and which have been
prepared and presented on different aspects of accounting standards.
IFRS enhances consistency in reporting standards
IFRS enhances consistency in presentation of accounting reports internationally. Consistency is a
key ingredient when making comparisons. The performance of particular companies can be
compared over a long period of time. Without one standard, international accounting would be
almost impossible to compare with other competitors especially on financing and the period
covered on financial accounting period. Sharing a similar international accounting language that
covers accounting disclosures and transparency is necessary for potential investors who seek
comparable financial or accounting information to enable well-informed investments decisions.
Consistency makes it possible for everyone to understand accounting information and the basis
of their preparation and presentation. The Americans will be able to conduct more business in the
global scene as most companies would have financial statements that are easily understandable.
For example, the US still uses the old customary system that the British government introduced
before independence. Most countries currently use the metric system even the highways and
basic unit standards internationally are in metric terms.
Facilitates globalization
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IFRS enhances competitive globalization of markets. The effects of globalization are mostly
positive and to be part of the global market most countries are adopting consistent systems of
organization that facilitates the growth and expansion of the financial markets. The IFRS
adoption would make the US part of the global economy by allowing its companies to participate
effectively in the global market.
IFRS is internationally acceptable
IFRS is internationally acceptable. The standards that have been adopted by the IFRS are already
acceptable universally. Most countries have even changed and adopted the accounting standards.
By adopting the IFRS, the US would be expanding its competitive market to include the foreign
market given its vast resources and multinational corporations.
Provides international updates
The international accounting standards’ enables international companies to stay informed on the
latest updates occurring in the international scene on accounting standards.
Contents
The other reasons for adoption of the IFRS are concerned with the content of the IFRS compared
to the GAAP. However, it’s notable that certain aspects of the GAAP were more superior and
effective than the IFRS. But to remain globally competitive, the US has little choice but also to
adopt the new standards (American Institute of Certified Public Accountants 18)
IFRS requires less details compared to GAAP. For example, in the case of revenue recognition,
due to the guidelines set under GAAP on the volume of revenue, a detailed analysis is required to
determine and evaluate the differences in the accounting basis used (PWC 13). The concept of
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IFRS is principles-based just as much as the US GAAP but the US GAAP is much more rules-
laden especially in the area of revenue recognition.
The IFRS also utilizes the single step system of writing down goodwill impairment as compared
to the two step system in GAAP accounting (PWC 180). The loss recognized is basically not
permitted to exceed in anyway the total value of goodwill in the financial period. The
impairment charge for that period is included in the operating income under GAAP. Under IFRS,
the impairment loss is allowed to be allocated on goodwill and on other assets of the company.
The carrying value of the goodwill can be exceeded by the loss incurred by a company. The
IFRS recognizes that the value of goodwill can exceed losses incurred in a particular season
which is more acceptable than the rigid US GAAP policies. The other inconsistencies are noted
in the application of the LIFO.
IFRS has made it mandatory that the statement of equity must be included as a primary financial
statement where as the US GAAP allowed the statement to be included on the company notes.
This statement provides essential information on the company’s equity and financial sources.
Enhance efficiency and cost effectiveness
The move to IFRS by US companies would enhance efficiencies and also result in cost savings
activities. Foreign companies, like Procter and Gamble have already adopted the IFRS standards
in all their foreign subsidiaries and they are in the process of adopting the standards in the whole
organization. The usage of the IFRS strengthens company’s position when negotiating credit
terms with financial institutions as it enables convenient reduction of cost of borrowing due to
the positive nature of IFRS on credit ratings. IFRS also enables easy initiation of partnership
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across border acquisitions, effective policy implementations and development of cooperation
between different companies internationally.
Although the change to IFRS would be substantially beneficial to the US companies there a few
reservations that have to be mentioned. Just as much as the US GAAP was rule based and it
defined all the aspects of accounting standards, the IFRS has some loopholes that create
uncertainty when evaluating financial statements. The IFRS allows accounting managers to
generally exercise their own discretion when making judgment on what to report on their
financial statement. These uncertainties results discrepancies that may cause some discomfort
among the potential investors or shareholders who may be privy to such information. Such
uncertainties may affect the company’s ability to receive financing from certain financial
companies who may be aware of such information and it may also cause the general public to
doubt the financial reports.
But it would more uncertain if all the companies are allowed to prepare financial statements in
their own versions and interpretation. The problems of uncertainties in IFRS can be addressed in
its forums and the updated information on the standards passed on to the rest of the members
(Albrecht, 2008, pg. 1). International accounting language would provide beneficial comparisons
and understanding of financial statements that would eventually translate to cost savings and
other benefits on market expansion internationally for multinational companies (Journal of
Accountancy 15) The need to change from US GAAP would be difficult in the initial stages and
during its subsequent implementation but the benefits to be derived from the adoption are
enormous and cannot be compared to the problems of implementation and policy restructuring
to accommodate the changes. The EU experienced a lot of problems when implementing the
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IFRS as most of the working structures and common policy adoption between several member
countries were still to be implemented. But it’s currently facing no challenges.
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References
Albrecht, David, Why IFRS Won’t Work in United States, 13 November 2008,
American Institute of Certified Public Accountants; International Financial Reporting
Standards. Durham, NC: AICPA 2008
Jennings Marquita. Why Switch to IFRS from GAAP, The Summa, 29 October 2008,
Journal of Accountancy, SEC Roadmap for Transition to IFRS 2008
Pricewaterhouse Coopers, Benefits of Changing to IFRS, On-line. 2008
PWC IFRS and US GAAP: Similarities and Differences,
